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Business Bytes

Questions to pop exuberance bubbles

The option to go public provided a revolutionary way for a business to raise funds, beyond appealing to a wealthy benefactor’s eccentricities or sensibilities.  While I am no stock market scholar, it seems that the public option provided the primary way to raise funds for many, many years.  That “venture capital” and “angel investing” are buzzwords suggests that some sort of shift has occurred.  Now, to access the kind of funds for growth that had required going public, companies can now potentialy access many sources of private capital.  Such a model begs the question: why go public?

It could be that going public allows for greater funding over the long-term and that public ownership makes companies less dependent on venture capitalists and angels.  However, this argument has its own problems.  First of all, the value of public companies changes daily, hourly, minutely.  Also, company leaders must report to shareholders and the board of directors. Between changes in valuation and managing relationships, it is hard to make the argument that public companies benefit from functioning any more independently.  Also, relative to public companies, widespread venture capital is a new phenomenon, and so its ability to generate funds as compared to the stock market requires further evaluation.

While this may be an overly simplistic interpretation, it seems as though “going public” functions as some sort of finish line to show the world that a start-up is now a serious business.  Such a move takes the standard hoodie uniform from an everyday essentail to intentionally ironic.  If going public is more about the “hurrah” than anything else, it is likely that some companies go public when perhaps they should not.  I believe two questions should be asked of all companies, but especially those with hopes of an IPO.

1) What’s your value-add?

2)Can you get anyone to pay for your value-add?

I have previously explored the idea of a value-add.  Essentially, a company can take a concept and enhance it to provide a unique product.  Some refer to this idea as “differentiation,” but I find the term “value-add” more useful and evocative. For example, LinkedIn took the concept of “social-networking” and created a value-add with social networking for professionals.  A company can have multiple value-adds.  To the consumer, Amazon adds the value of finding the best deals across a variety of goods.  To other businesses, Amazon adds a broad swath of web services.

It is in attempts to answer the second question that social media titans seem to have difficulty.  Both Twitter and Facebook have correctly identified their value-add as connecting people to one another to create vibrant communities.  Both also know that use of their site is highly elastic: people will substantially change their behavior in response to a change in the product’s price.  If either site introduced a monetary fee for use, it could expect use to greatly decrease.  So goes use, so too goes the value-add.

Just about every site has decided that, since it can’t charge for use without losing users, it will get money from selling real estate on its site, i.e. advertising.  However, since just about every site offers advertising space, a site must really make the case that it can provide access to a unique audience.  This is a very hard case to make given that people use multiplie sites throughout their day.  Also, since so many sites offer advertising apce ( a glut of supply, really) it drives the value of space on a site down.  Sites like Facebook and Twitter, with a strong brand name and user base can likely command a bit more, but it seems ulikely that the advertising premium can create substantial revenues over the long-term.

As should be ecpected, going public does not provide benefits absent costs.  It is assumed that when a company goes public it anticipates that the benefits will outweigh the additional costs.  However, “irational exuberance” is an oft-used term for a reason and it may be that the decsion to go public trades rational cost-benefit analysis for Wall Street swagger.

Shareholders expect payment, if not necessarily in dividends in increased stock value. A company must prove that people are paying for its goods to have any value on the street.  While any company on any street: wheter Wall Street or Main Street must get people to pay for its goods and services, to achieve the kind of valuation that pleases investors and analysts alike requires not just that people pay but that they pay enough to motivate higher share prices.

To meet the increased expectations can requireachange to the product.  Both Facebook and Twitter have changed advertising techniques, which has illicited some chagrin across users.  However, judging by various comment boards, many sers seem unimpressedand unlikely to even click on any ad.

Twitter has begun blocking access to its API on their party platforms, like Facebook and LinkedIn, perhaps in an effort to monetize the API.  Such a move, though, limits users’ access to Twitter: new attempts to monetize then limit audience scope and decrease Twitter’s value.

In some ways, start-up companies seem to have been given a free-pass on the making money part of a business.  Maybe that’s why “monetization” became a buzzword, to justify its status as an “after”: after completing the code, after the angel wants to see a bit or return, etc. Going public brings a lot more than tax returns to light: it can show a money maker sufficient to sustain business but without enough shake to shake-up Wall Street.

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