During the first few years of your company’s existence, you may seek progressively larger investments to help your company grow. For some companies, this progression takes them to the sources providing the biggest influx of cash.
Joint ventures, venture capital and initial public offerings (IPOs) are sophisticated financing techniques that can pump millions of dollars into your business. The common thread is that these major benefactors are equity financiers. They will become at least partial owners of your business. The more money they invest in your company, the more likely you will lose control of the business you founded. Some business owners accept the tradeoff, while others won’t.
Joint Venture
When like-minded companies bring with them complementary skills, expertise and markets, a joint venture could make sense. A joint venture starts with a legal agreement between two parties. One party may provide, for instance, a cash infusion, while the other offers a new market. In the best-case scenario, they don’t duplicate experience or expertise.
With this agreement, both companies share assets and risks, but they may not be equals. A competitor, for example, may provide the majority of resources and new markets. Hypothetically, let’s say your joint venture partner requires a 60% stake in your company. Now you are no longer the majority owner. In return, maybe the 40% you receive on significantly higher profits is greater than 100% of what you earned before the joint venture. Is the tradeoff worth it?
Joint ventures often fail because of clashing cultures, expectations and ideas. So it’s important to put every detail you consider important into the legal contract governing your partnership. This includes how much influence you expect to wield, whether your employees remain with the company, and much more.
Venture Capital
Known for their ability to pick winners, VC organizations look for high-potential, early-stage businesses. Feel honored if your company pops up on their radar, but understand they expect a return – ownership in your company – for what they provide. Depending on the amount invested, you could become a minority owner of the company you started.
Know, however, it is in the best interests of venture capitalists to provide the cash and expertise necessary to take young companies to the next level and realize a profit. See this section of the Playbook for more information.
IPO
When they start out, some small business owners see an initial public offering as the culmination of their dreams. Private companies have relatively few shareholders. Public companies have potentially thousands of shareholders. Going public offers a potentially vast source of liquidity.
Facebook, for example, raised more than $16 billion in its first day of trading. Most companies, however, don’t fare nearly as spectacularly. History is littered with companies conducting big IPOs, only to flame out. Webvan, for instance, raised $6 billion its first trading day, only to file for bankruptcy two years later. But done right, an IPO can become your company’s crowning achievement. It also subjects your company to public scrutiny.
The process of preparing to take your company public takes years before an actual IPO happens. At a minimum, the Securities and Exchange Commission requires three years of audited statements. You’ll also need a solid financial reporting framework in place. The SEC, which governs publicly traded securities, requires IPOs to file specific financial reports periodically.
Also consider where you want your company listed. The major stock exchanges have minimum requirements – you must show significant pre-tax earnings over time. An IPO is probably one of the most complicated financing methods there is, so consider hiring a chief financial officer, an attorney and an investor relations expert early in the process.
This is only a small part of the work needed before a company goes public. You need to interview and hire an investment bank to underwrite your company’s public offering. This bank will require many documents, including a plan showing how your company will provide required public disclosure, identify markets and project for future growth.
Beyond starting the work that’s needed for an IPO, consider whether you welcome the increased scrutiny, public face, complex regulatory requirements and your potentially reduced role in your company.
Beyond starting the work that’s needed for an IPO, consider whether you welcome the increased scrutiny, public face, complex regulatory requirements and your potentially reduced role in your company.
