Platt Perspective on Business and Technology

Planning for and building the right business model 101 – 15: exit strategies, entrance strategies and significant business transitions 5

Posted in startups, strategy and planning by Timothy Platt on November 26, 2015

This is my 15th posting to a series that addresses the issues of planning for and developing the right business model, and both for initial small business needs and for scalability and capacity to evolve from there (see Business Strategy and Operations – 3, postings 499 and loosely following for Parts 1-14.) I also include this series in my Startups and Early Stage Businesses directory and its Page 2 continuation.

I have been successively discussing each of a set of strategic goals that a business can be built towards as it transitions through and then beyond its initial startup and early stage beginnings, which I repeat here for purposes of continuity with the past four installments to this series:

1. Maintaining your business yourself as a privately held, wholly owned entity,
2. Maintaining your business yourself as a privately held entity but with a restricted set of shareholders in the form of angel and/or venture capital investors backing you,
3. Going public as an initial public offering (IPO), and
4. Selling your business for incorporation into another, probably larger business through merger and acquisition processes.

I focused on the first of these options as a basic default business development planning model in Part 11 and Part 12. And I continued on to consider the second of these scenarios in Part 13 and Part 14. Then, to bring this briefly sketched summary up to date, I stated at the end of Part 14 that I would continue from there with scenario 3 from the above list, and that along with addressing that and scenario 4, I would also consider crowdfunding too, as a business development option.

I begin addressing all of these upcoming issues here, starting with planning option 3 and with building a business with a goal of going public through it, with an initial public offering and with funding support provided through sale of publically traded stock shares. And as a starting point to that, I begin by considering two fundamental factors that come into play for these scenarios in general:

• Timing, and
• The balance between outside supportive funding received and costs incurred from accepting it.

I begin with timing and with the obvious: when you pursue scenario 1 from above, you actively do so from the very beginning, and from your earliest pre-launch planning. Scenarios 2 and 3 can only actively come into play when you and your new venture have proven yourselves enough to meet basic third party due diligence requirements (certainly for option 2), and until you have had opportunity to meet and complete documentation and filing requirements, and with ongoing empirically validatable proof that you are building a viable business to justify that (for option 3 from above.)

Yes, Google went public before it first began posting anything like consistent, reliable profits (see this brief history of Google.) And Google’s market valuation as set at the end of its first trading day went way up into the billions of US dollars. But Google was already capturing a dominant position in online search, and it was essentially certain that search would become a very profitable business sector, even if businesses entering it were still working out the basic details as to how to monetize search as a service offering in early 2004. My point here is that while an established if perhaps still early record of profitability might be the traditional benchmark for proving an IPO to be a viable next step, simply being able to argue and justify a likelihood for that happening can be sufficient to meet the basic due diligence requirements for going IPO. Rightly or wrongly, the age of the dot-com company has been one of businesses that have yet to achieve real profitability and that have not yet exited their early stage through reaching that performance goal, directly taking the leap into becoming publically traded.

My goal here is not to delve into the details of going public, and I will simply note that in the United States this means having a certified public accountant (CPA) approved and probably largely-CPA written business plan and prospectus, and meeting a whole series of Securities and Exchange Commission (SEC) requirements, and going through a lengthy and exacting filing process. And that is just to go public in the first place and to offer shares of stock as a matter of principle. A would-be publically traded company has to determine how many shares and of what class types to offer and at what initial per-share cost, and how many of them to actually offer for sale and how many to retain, and as business assets and as property of that business’ founders and anyone else who has accrued equity there. And after a business goes public and offers shares through a publically trading stock exchange, they face ongoing financial and related disclosure requirements and all of the business process and expense-generating requirements of this public reporting.

Essentially any and every country that allows its privately held businesses to go public and sell stock, develops a comparable system for all of this. And international trade and commerce, and transnational business structures and their increasing prevalence dictate that these systems operate according to consistent, compatible rules and processes too.

Businesses that pursue this capital fund-raising growth and development strategy take on contractual obligations to their shareholders, essentially exactly as they would, at least in basic principle, to venture capital investors who invest in them – except that here, their obligations are to much larger numbers of investors who individually, in most cases hold smaller numbers of shares and who have correspondingly smaller voices in the running of the business. But this imposed transparency into a business’ finances and into its financial strength offer validating value to the organization too – as well as an ongoing pool of available investment funds.

There is of course a lot more that I could add here, and to note in passing just one of these areas of potential discussion I cite the way that individual publically traded companies are usually evaluated by market analysts short-term, and even when these businesses themselves need to plan and act from a longer-term strategic perspective. Most market analysts look out one quarter at most, and certainly in their more widely published evaluations, while businesses need to be able to plan at least a full year and more moving forward, and usually pursue multiple year strategic plans. Five years forward is common, even if no one expects their longer term plans to remain unchanged as events unfold. And this shorter-term market analysis-based valuation driver, and the timing disparities that can and do arise between it and business needs affect what a business can do and when and with what priorities – and still retain a competitively high per-share valuation. I will look into this and a few other related issues later in this series when explicitly discussing friction in its context. But with this much offered here about scenario 3, I will turn to consider scenario 4 from above:

• Selling your business for incorporation into another, probably larger business through merger and acquisition processes.

Then as noted above I will discuss crowdfunding as a business development enabler, and business and marketplace friction. Meanwhile, you can find this and related postings and series at Business Strategy and Operations – 3 and also at Page 1 and Page 2 of that directory. And you can find this and related material at my Startups and Early Stage Businesses directory too and at its Page 2 continuation.

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