Startup = Growth; IPO = Revenue

Landscape image of Colorado Rockies representing an allegorical Revenue Mountain
Standard

Ever had that spark of doing your own thing, wanting to make an impact, change the world through technology? Great, hold on to that feeling, shelve it, admire it, and cultivate the passion. Next, read Paul Graham’s essays, especially the Startup = Growth piece.

Now that you have an idea of what a startup is, I want to tell you about what a post IPO company is. Granted, I am yet to experience an exit, so do take this with a grain of salt. But, I do have an honours degree in Finance, and did manage a sector in a student investment fund, so I’ve had at least some hands on experience in equity valuation.

So what do investment analysts do with publicly traded companies? Everything is predicated on forecasting Growth of Future Revenues and assigning a price to those revenues. This basic premise is all there is to finance. Literally, it’s a projection on growth of future revenues. Any formula you take, the P/E ratio, the Discount Cash Flow Valuation, Earnings per share, all of these are just different methods to skin the same cat. Each method, stabs at trying to put a price on future ability of a company to generate revenue and grow it. That is it. Here, if you don’t believe me: http://en.wikipedia.org/wiki/Stock_valuation

Public Companies have shareholders, who’s demands are very simple. They want their shares to grow in price. Shares grow in price if a company can show consistency in growing their revenues, thereby commanding a higher Price to Earnings (P/E) ratio. Price of stock goes up, the street is happy, the board is happy, the shareholders are happy, CEO gets to keep their job. 

If Startups = Growth, Post IPO (Public Companies) = Revenue.

Ok, so Revenue growth determines stock prices, what does that have to do with post IPO companies?

Product growth becomes secondary, everything else becomes secondary. What is most important is impacting that top line Revenue number. Side note, no wonder the shady accounting practices, the incentives are there to do anything but report bad news on Revenue.

Miss your estimated revenue target by $1? Stock price dips 20%, CEO’s job is at risk.

What does that mean? More importantly what does that mean for a startup who’s growth driven by user acquisition?

It means the focus shifts from land grab, to making that user acquisition cost break even and start making profit. It means product development no longer focuses on being on the bleeding edge of technology and feature set, its first priority is towards maintaining the existing Revenue stream and growing it. For the most part, better attention to the already existing customers, as they become the de facto arbiters of a company’s health.  It also means the organization changes within, to avoid breaking the lifetime chain. This change isn’t inherently good or bad, it’s just it, change. A transformation from a caterpillar into a butterfly. Both are beautiful at each stage. Although the process is a bit ugly 🙂

The important thing is to be ready for it. Ready for Revenue.

Are you ready?

Leave a Reply

Your email address will not be published. Required fields are marked *