Why stumble unicorns
We publish a translation of an article about what knocks down "unicorns" rushing to the open market: about the placement of shares, the takeover of the company before the public access to the open market, and unfulfilled expectations.
Lance L. Smith, President & Chief Operating Officer Fusion-io
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In early February 2016, a study of financial transactions published by the Wall Street Journal revealed that investors are increasingly protecting themselves from the effects of initial public offerings, which may not meet expectations. This is a side effect of the fall of the so-called "unicorn" -technical startup, estimated before the placement of shares of more than a billion dollars.
While companies are attracting funds at a late stage before entering the open market, enterprising investors form the terms of the transaction in such a way as not to lose a cent if the public offering of shares does not bring the expected profit. This can cause damage to a startup, if entering the market does not meet expectations, as happened with many companies that have placed shares in 2015.
As a former venture investor, former president and technical director of a pioneer company in the production of flash cards Fusion-io (which placed shares in 2011, and then bought the company SanDisk in 2014) and the current director of a startup engaged in data virtualization Primary Data (which attracted 60 million dollars in the first round of venture financing), I very closely monitor investment trends.
I have noticed several particular difficulties of companies that have reached the level of the mythical "unicorns" before they bring profit to investors through a takeover by another company or a public offering of shares. (If you need to refresh your memory, Fortune published a great review article on unicorns in 2015 ). Simply put, many of these companies end the runway before takeoff.
Engine starting
The goal of any startup is, at a minimum, that should be voiced by potential investors to attract capital and finance the growth (?) Of a company to create a scalable and profitable business. Usually, venture capital companies seek to bring profits to their investors by increasing liquidity (or “exit”), namely, by selling a company or publicly offering shares.
For this, the company needs to increase its market value by creating an innovative product, attracting customers and generating income, and then profit. If you do this quickly, and at the same time tightly control costs, the company can minimize stock splits and maximize return on investment for those who have invested in the development of the company.
Unicorns "fade"
When a company begins to earn money, rather than absorb money, it takes less and less rounds of funding to get back on its feet. Although, the fact that the company began to attract less investment, because can do with its own means, means only that the startup is going through a stage of marketing success, known as the "Unicorn Horn".
Considering how many companies received offers of lower value last year when they entered the stock exchange, compared to the estimated cost during the later rounds of financing, it is no secret that unicorns "fade away". Evaluating the prospects, I hope that more entrepreneurs will focus on creating a stable company, rather than making profit at any cost and turning into unicorns - to make the market for technology investments more stable and to become the backbone of the American economy in the long run.
Slow acceleration
Acquisition of a company before a public entry into the open market can occur for various reasons, so let's not focus on this for now. In a public offering of shares, some of the problems that arise are associated with the last burst technical bubble. Historically, a public offering of shares was a more risky event when entering the market, but this was offset by a potentially huge gain.
Think of Amazon's share placement in 1997 , with a market capitalization of $ 438 million, which debuted on the stock exchange at a price of $ 18 per share. Today, the company is worth $ 257 billion, and one share is worth 530% (at the time of writing). And although this is the lowest value of the estimated cost over the past year and a half, analysts expect revenue to increase by tens of percent.
Amazon is undoubtedly the exception rather than the rule. When the bubble burst, they introduced more restrictions. As a result, startups reduce the growth potential for investors in the open market, and they, according to the recommendations, demonstrate strong sales growth before the issuance of securities, which leads to a curve of reduced growth. For example, most startups that are considering stock offerings now announce potential earnings of more than 100 million / year and show that they are already on the verge of making a profit, as was the case with Fusion-io.
The unicorn investment cycle dries up the growth potential of a company rushing to the open market. Unlike the previous era, when the company entered the stock exchange at an early stage of development, and the company had the best times ahead, now the fastest jump in the development of a startup occurs in the final stages of investing before a public offering of shares. That leaves 20-30% of potential growth after entering the stock exchange, and is an excellent option for companies with an income of 100-200 million dollars a year, but not so rosy for those who want to more than double the investment when placing shares.
Rebuilding in paradise
Solving these problems requires a slight adjustment of the course in the course of moving to the stock exchange. To leave room for future growth, start-ups in the final stages of financing need to be careful not to inflate the market capitalization and not to raise more money than is necessary for the development of the company before the placement of shares. This may present certain difficulties, because the investment rounds attract the attention of the press, increase the credibility of the company — which, of course, the young company cannot neglect.
Nevertheless, the reservation of part of the growth potential guarantees sufficient space for the company so that the company develops after entering the stock exchange and brings profit to investors in the open market, just as the company brings profit to its venture funds. Otherwise, you create another unicorn, and at the last stages investors collect all potential creams and even impose money back guarantees. This is an undesirable situation for new investors on the stock exchange, and quite unprofitable for company employees who receive only meager income from shares as compensation for years of hard work and sacrifices.
The first persons of the company and members of the board of directors of companies must, before publicly offering their shares, make sure that the company's development strategy itself will provide profit (return on investment) and continuous growth of the company. At this point, again consider the option of absorption of the company. Even companies that have just entered the open market suddenly reduce their risks and costs, so there are a lot of takeover offers on the market now. Research and development of long-term projects may not be attractive in the eyes of an investor on the open market; instead, companies buy innovations to grow the company.
The technology market is developing very quickly, so this strategy can help the company adapt to changing conditions. It is even better to have a team of experienced managers who can plan a profit scheme in the long run and provide the capital necessary for making strategic decisions and competent investing in the development of the company in the market.
I hope that more reasonable times lie ahead, and we will learn how to ensure the company's long-term growth and increase its value not only for investors, but also for clients, employees and the economy as a whole.
Lance L. Smith, President & Chief Operating Officer Fusion-io
')
In early February 2016, a study of financial transactions published by the Wall Street Journal revealed that investors are increasingly protecting themselves from the effects of initial public offerings, which may not meet expectations. This is a side effect of the fall of the so-called "unicorn" -technical startup, estimated before the placement of shares of more than a billion dollars.
While companies are attracting funds at a late stage before entering the open market, enterprising investors form the terms of the transaction in such a way as not to lose a cent if the public offering of shares does not bring the expected profit. This can cause damage to a startup, if entering the market does not meet expectations, as happened with many companies that have placed shares in 2015.
As a former venture investor, former president and technical director of a pioneer company in the production of flash cards Fusion-io (which placed shares in 2011, and then bought the company SanDisk in 2014) and the current director of a startup engaged in data virtualization Primary Data (which attracted 60 million dollars in the first round of venture financing), I very closely monitor investment trends.
I have noticed several particular difficulties of companies that have reached the level of the mythical "unicorns" before they bring profit to investors through a takeover by another company or a public offering of shares. (If you need to refresh your memory, Fortune published a great review article on unicorns in 2015 ). Simply put, many of these companies end the runway before takeoff.
Engine starting
The goal of any startup is, at a minimum, that should be voiced by potential investors to attract capital and finance the growth (?) Of a company to create a scalable and profitable business. Usually, venture capital companies seek to bring profits to their investors by increasing liquidity (or “exit”), namely, by selling a company or publicly offering shares.
For this, the company needs to increase its market value by creating an innovative product, attracting customers and generating income, and then profit. If you do this quickly, and at the same time tightly control costs, the company can minimize stock splits and maximize return on investment for those who have invested in the development of the company.
Unicorns "fade"
When a company begins to earn money, rather than absorb money, it takes less and less rounds of funding to get back on its feet. Although, the fact that the company began to attract less investment, because can do with its own means, means only that the startup is going through a stage of marketing success, known as the "Unicorn Horn".
Considering how many companies received offers of lower value last year when they entered the stock exchange, compared to the estimated cost during the later rounds of financing, it is no secret that unicorns "fade away". Evaluating the prospects, I hope that more entrepreneurs will focus on creating a stable company, rather than making profit at any cost and turning into unicorns - to make the market for technology investments more stable and to become the backbone of the American economy in the long run.
Slow acceleration
Acquisition of a company before a public entry into the open market can occur for various reasons, so let's not focus on this for now. In a public offering of shares, some of the problems that arise are associated with the last burst technical bubble. Historically, a public offering of shares was a more risky event when entering the market, but this was offset by a potentially huge gain.
Think of Amazon's share placement in 1997 , with a market capitalization of $ 438 million, which debuted on the stock exchange at a price of $ 18 per share. Today, the company is worth $ 257 billion, and one share is worth 530% (at the time of writing). And although this is the lowest value of the estimated cost over the past year and a half, analysts expect revenue to increase by tens of percent.
Amazon is undoubtedly the exception rather than the rule. When the bubble burst, they introduced more restrictions. As a result, startups reduce the growth potential for investors in the open market, and they, according to the recommendations, demonstrate strong sales growth before the issuance of securities, which leads to a curve of reduced growth. For example, most startups that are considering stock offerings now announce potential earnings of more than 100 million / year and show that they are already on the verge of making a profit, as was the case with Fusion-io.
The unicorn investment cycle dries up the growth potential of a company rushing to the open market. Unlike the previous era, when the company entered the stock exchange at an early stage of development, and the company had the best times ahead, now the fastest jump in the development of a startup occurs in the final stages of investing before a public offering of shares. That leaves 20-30% of potential growth after entering the stock exchange, and is an excellent option for companies with an income of 100-200 million dollars a year, but not so rosy for those who want to more than double the investment when placing shares.
Rebuilding in paradise
Solving these problems requires a slight adjustment of the course in the course of moving to the stock exchange. To leave room for future growth, start-ups in the final stages of financing need to be careful not to inflate the market capitalization and not to raise more money than is necessary for the development of the company before the placement of shares. This may present certain difficulties, because the investment rounds attract the attention of the press, increase the credibility of the company — which, of course, the young company cannot neglect.
Nevertheless, the reservation of part of the growth potential guarantees sufficient space for the company so that the company develops after entering the stock exchange and brings profit to investors in the open market, just as the company brings profit to its venture funds. Otherwise, you create another unicorn, and at the last stages investors collect all potential creams and even impose money back guarantees. This is an undesirable situation for new investors on the stock exchange, and quite unprofitable for company employees who receive only meager income from shares as compensation for years of hard work and sacrifices.
The first persons of the company and members of the board of directors of companies must, before publicly offering their shares, make sure that the company's development strategy itself will provide profit (return on investment) and continuous growth of the company. At this point, again consider the option of absorption of the company. Even companies that have just entered the open market suddenly reduce their risks and costs, so there are a lot of takeover offers on the market now. Research and development of long-term projects may not be attractive in the eyes of an investor on the open market; instead, companies buy innovations to grow the company.
The technology market is developing very quickly, so this strategy can help the company adapt to changing conditions. It is even better to have a team of experienced managers who can plan a profit scheme in the long run and provide the capital necessary for making strategic decisions and competent investing in the development of the company in the market.
I hope that more reasonable times lie ahead, and we will learn how to ensure the company's long-term growth and increase its value not only for investors, but also for clients, employees and the economy as a whole.
Source: https://habr.com/ru/post/300406/
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