If you think your business is worth millions but no one will buy it, is it actually worth anything?
There is something very fundamentally broken with the entrepreneur / small business model. What that means, is that if you are a ‘successful’ small business owner you will probably never be fully rewarded for the time, money and heartache that you have poured into your business. Surely the lack of sleep and the fact you remortgaged your house to keep the business going has got to be worth millions, hasn’t it?
In fact, while every day your employees, suppliers, landlords and a whole ecosystem of partner companies extract value from your business. You, as a founder, would have made more money in the last decade if you had just worked your way up the corporate ladder. Depressing isn’t it?
The trouble lies with the way value is exchanged. Your business may very well be worth millions to the economy and society, but unless you can convince someone to part with some cash for shares of that business, it is actually worth very little to you.
Back in the good old days, the answer was simple, grow the business, list it on a stock exchange, the founder finally gets to pocket some cash, the company gets an infusion of capital to help it scale and everyone’s a winner. Can’t make it to the main market? Well there is probably a secondary market happy to take your fees.
Yet somewhere along the way, this ultimate ambition of getting listed started to lose it’s allure. In the last 20 years public listings have halved. Last year there were less listings then at the height of the global financial crisis.
There are 2 key drivers to this.
The first is the process, the second is the outcome.
The process of getting listed is excruciating for entrepreneurs. Most Investment Banks concur that the average listing will take you 18 months, cost you in the region of $3m+ and will tie up your senior team for at least the last 12 months before you list.
James Freeman, the Founder of Blue Bottle Coffee summed it up very astutely ‘It seems like a way of living in hell without dying’
He’s not wrong. And so he decided not to list.
And then there is the result. Get listed and while you do suddenly find yourself with an asset you can trade you have entered a completely alien world and are now at the beck and call of thousands of investors who believe that owning a share of your stock gives them the right to question your every decision. In fact, you will soon find the people that question your decisions the loudest often don’t even own your stock.
Those that do own your stock are generally playing a very very different game from the one that you are playing. As an entrepreneur you have spent the last decade of your life making decisions around how you can create more value for others. Your team, your clients, your partners. All the things that you needed to do to build the company and in almost every case the results that you saw from these decisions took years. Yet suddenly you are faced with an army of investors who may buy and sell your stock dozens of times within a single day! The vast majority of your shareholders are traders, they don’t care about long term value they want to make money when the shares go up and when the shares go down. And if that means spreading false rumours on the Internet then so be it.
Yet for all that the market has many flaws, in many cases it is still the best option for finally releasing some liquidity and ‘unlocking’ the value that you know is in your business.
A new way to solve these problems
Fortunately for us, where there are problems there are opportunities and where there are opportunities, entrepreneurs inevitably follow. Here is a quick look at 3 of the solutions being put forward to help entrepreneurs get liquid.
Chamath Palihapitiya, a US based VC investor has listed an empty shell company on to the New York Stock Exchange and is offering it up to companies to let them ‘reverse in’. In effect being acquired by the shell to give them all of the benefits of a listing but without the pain and cost of the process. His target is the multitude of tech Unicorns ($1B+ valuation) that are flush with investor capital and so don’t need the headaches associated with traditional listing but would like to reward staff, founders and early investors.
Eric Ries (he of Lean Startup fame) is not just trying to hack the system like Chamath, he is actually trying to reinvent the whole market place. He is building his own marketplace called LTSE (Long Term Stock Exchange) and one of the tenants of his new system is that the longer you own stock, the more rights you are granted. Hence founders keep control and day traders can do what they like but have less sway over the company direction.
You will notice that the first two of these options come out of Silicon Valley, but if you are like the vast majority of small business owners you will have also realised that whilst Silicon Valley is great for disruption and buzzwords, most of what goes on over there has very little impact on you, your business or anyone you know.
The third option I’m going to talk about did not come out of Silicon Valley, is not aimed at Unicorns and doesn’t need a whole new exchange to make it work.
Concept of Agglomeration.
Similar in concept to Chamath’s model, an ‘Agglomeration’ is a listed vehicle exclusively for the use of other companies to allow them to get the benefits of listing. However, in this case the target companies are small to mid size across any sector. These are solid, debt free, profitable companies run by industry leaders. The founders swap their private stock for public stock and then carry on running the business as they were. They get all of the advantages of a PLC with none of the time and costs associated with a traditional listing.
The best way to think of this is to think of Warren Buffet’s Berkshire Hathaway. A holding company that owns many others but doesn’t interfere in the running of each.
While it has never been a better time to be an entrepreneur there are still some huge hurdles to overcome. The vast majority of government and media attention is not on those companies that have figured out how to solve problems and create value in the world, but on those that are in the glamourous world of ‘startups’. A weird parallel-dimension where fundamentals such as generating revenue, profit and cashflow play second fiddle to finding an investor to bankroll you. Yet eventually, some good businesses will emerge from there and before long the founders will look around and realise that they too might have a business worth millions on paper and yet have nothing to pay school fees with.
The capital markets may be broken but they are the best we have right now for rewarding entrepreneurs and allowing investors to benefit from scaling businesses.
All innovation in this area is to be applauded. Anything that can serve to reconnect entrepreneurs and changemakers with the liquidity needed to both inspire and fuel their ambitions is a good thing. We would then, finally, have a system that truly rewards those that take the risk and create the value in our society.