In Vancouver’s Gastown, if you tossed a rock hard in any general direction, you’re going to hit a tech worker in the side of his horn-rimmed head. Or a homeless guy, but most likely a tech worker.
The west coast home of exposed red brick is positively brimming with skinny jeans wearers, with office space after office space crammed with standing desks and foosball tables and the faint smell of 19-hour days.
But if you asked the people starting those companies how they raise finance, chances are they’d tell you they’ve sold their soul to one of the city’s incubator honchos.
20% for $75k? Sold. Need $100k more? Let’s top it up to 51%, and now you’re one of 30 assets owned by a guy who probably sold a bike-sharing app for $100m back when nobody asked questions about apps, but who won’t break his back for your little pack o’ nerds unless he gets more equity or there’s an exit looming.
Venture capital is a horrible racket. Angel investing likewise. Sure, there are some guys who know their way around business growth and can shepherd something new along, but more often than not, tech incubators are just collecting shiny things and waiting for the 1 in 20 that makes it to positive revenue to cover the cost on all the others.
Which means your startup is either paying for all the others that failed, or is going to be one of those others. Neither is a particularly attractive option, in my opinion.
What is attractive? Why, going to the people, of course.
No, I’m not humping for Kickstarter. Crowdfunding is fine if you’re looking to make a Dr Who backpack or a boardgame for steampunk enthusiasts.
But it’s not something you can go back to whenever your cash goes low.
The public markets – are.
When a company lists on the exchange, there’s nobody to tell you, “Oooo, not in that colour.” There’s no Blackberry-pounding self-professed expert looking down at everything you do and chastising you for not hitting double digit market share growth every quarter. There’s nobody registering your desperation for more funds and yanking his initial offer, only to make an adjusted shittier offer that he knows you have to sign.
The public markets make it simple. You list. You make public your plans. The public, if it likes your plans, likes you, and thinks you’re going to nail it, buys your stock. And the more it buys, the higher your valuation.
There are no ‘down rounds’, no combinators, no bullshit outside-imposed deadlines, no personalities to concern yourself with, no secret plans to take your company after you’ve worked for free for three years.
When you’re on the public markets and you need money, you go find some brokers to talk to their investors, you show them what you have planned, and (if you’re on top of things) the money comes in. And when that money runs out, you can go back for more.
Why would a tech startup go any other way?
Now, granted, that’s not to say the public markets are all cherry pie and rainbows. It’s true, if you list on the exchange, now you have a whole lot of smaller bosses who you need to keep happy. Because, if you don’t, they’ll sell their stock and you’re now worth less, and once that hamster wheel starts turning, you’d beg for the comfort of a down round.
Some tech CEOs have struggled in dealing with public expectations. Mike Edwards is a Vancouver tech god, with a fat exit behind him and a long line of entrepreneurs who’d love him to be on their board, but when he launched LX Ventures (now Mobio) as a public markets tech incubator a few years back, he snatched defeat from the jaws of victory pretty quickly, and consistently.
Having launched the Mobio celebrity social networking app, and with his people having dragged in Kardashians, Cristiano Ronaldo, and every hot tween icon of the moment, LXV stock ramped up quickly to just under a buck from a launch point of $0.15, in about six weeks.
I might take some blame for that jump, being as I was covering the company hard as it spat out release after release naming new celebs in the pilot phase.
But Edwards needed to get his pilot into release, and the thing never looked ready, and rather than double down to get it there, Edwards began getting distracted by other shiny toys, such as a Facebook contest platform that had never figured out how to make money, a health-based social network that he stopped talking about as soon as he owned it, a decent looking cloud-based services outfit that he flipped for a cash injection weeks after saying it was the most valuable thing he owned, and a tiny digital film distribution outfit (that I actually really like).
The stock took a dive and never pulled out of it.
In the midst of all that, Edwards stopped talking to investors about his plans and started openly talking about going public as ‘a mistake.’ Indeed, if you’re the kind of CEO who can’t take people looking over your shoulder, adding a few thousand small investors to your list of bosses is not a great move, and Edwards most definitely did not enjoy talking to shareholders.
I’ve often thought, over the years, about what I might have done differently, if I’d had Edwards’ ear or, even better, the wheel.
For starters, I would have talked more, not less, to investors. Communication is key if you want people to have faith in your plans, and leave their cash tied up in your ticker,and though you certainly have a commercial need to bot blurt out your whole strategy, you can sure as hell do better than just never talking ever. Second, I would have spun off Mobio while it was hot and brought in a dedicated CEO for it, rather than let it bleed out everything and eventually go in a fire sale. The thing needed devoted attention and an unmuddied business plan, and it never got that – and now it’s officially dead.
I would have thrown around less paper. Stock is nice as a way to buy stuff, but when it starts to go down in value, you end up with a lot of pissed off partners.
I would never have touched Strutta, which nobody was queuing up to buy and would have been cheaper in three months, and cheaper still if it had been left to die the death it should have suffered. A lot of big companies tried Strutta’s tech, but few came back for more and fewer still seem inclined to pay for it.
Funny thing is, none of this advice is new. If Edwards had listened to his shareholders, they were all saying the above as the stock dive was going down. In fact, people high up in the LX organization were saying similar things, and they left rather than ride the train downhill with a CEO who had his own (private) ideas.
Today, LX Ventures says it may struggle to remain a going concern, and just went through a 10:1 rollback which gave the stock a little breather before it shrunk right back down to almost nothing. At the time of writing, the company is worth under a million dollars and has had precisely zero wins.
Which may seem odd to talk about in an article suggesting the public markets are key to the tech sectors surging back.
Here’s the thing: If you’re a tired CEO who can’t figure out a good business plan, or a CEO who thinks as long as he just keeps buying stuff, the public will be on side, the exchange will figure you out quickly. But if you bring the energy you exhibit at the office into the marketplace proper, you’ll bring zealots in behind you. If you demonstrate that entrepreneurial spirit on a grand scale, the markets are your best form of marketing.
And when that day comes that you just need a million to tide you over until that big contract lands, the markets have got your back, son. Not just because your idea is good and you’re good at it, but because we can get out if you start to stink.
When a VC takes a 51% stake in your business and promises you glory, but they later find something they like better requires their money going forward, you’re done. They’ll shut you down and not think about it for a second. You don’t get any more cheques, you get told to pull the shutters down.
Trust me, you’ve got to have an amazing history of screwing up before you get to a place where nobody in the Canadian junior space will front you more cash. You may need to sell at a premium, and give warrants and gift cards and reach-arounds to make it happen, but Mobio was out there raising money just a few short months ago – and even with their terrible record, they oversubscribed.
On top of that – with a VC, you’re not getting your own investment cashed out unless you exit or die. There’s no liquidity, while the markets will buy your stock all day long.
Now, admittedly, going public can be a scary thing if you have no experience in that space, and that’s what the long line of experts who will help you through it are there for. The brokers, the merchant bankers, the lawyers, the accountants, the investors – they’ll all ‘help’, with the definition of that word differing pretty strongly from consultant to consultant.
When you go public, you either go through an IPO, which is where big banks underwrite you and you put out a prospectus and you work for a year to get it done and then you either get rich or you die, orrrr, you can go the reverse takeover route, where you basically take over a shell com,pany already listed on the exchange. that’s much easier, quicker, and less monumentally damaging if the open isn’t huge.
The end result of going public is a situation where your valuation is given to you by the entire North American public markets system, not some Asperger’s Syndrome sufferer with no socks and a strong desire to be Steve Jobs II. If you win big in the public space, your company goes to a $100m valuation and you still have control. That’s worth the extra scrutiny.
IF YOU WANT TO TAKE YOUR COMPANY PUBLIC:
Call me. Because I don’t take companies public for a living, but I know the best people who do.Disclaimer: ALWAYS DO YOUR OWN RESEARCH and consult with a licensed investment professional before making an investment. This communication should not be used as a basis for making any investment.