Greatest Bubble or Greatest Opportunity?
Here is how it happened:
- A great deal of the current stock market run-up is the result of international monetary systems and policies, initially fueled by low interest rates, especially in Japan. This led to the "Carry Trade" where companies borrowed money in Japan at two percent, and bought U.S. Treasury Bonds at four to five percent, which were then used as collateral to purchase hot stocks.
- The next phase involved the hot stocks trading their stock, rather than money for the stocks of others in the merger mania. These mergers were designed to capture technology, talent and market share. As more companies became solvent, more venture funds were formed and more IPOs appeared.
- The IPO craze was, in turn, fueled by the retail investors, day traders and some institutional investors, whose funds required them to be involved in industry sectors and index stocks.
All in all, it is a Bubble, and there is great controversy over whether it will burst or continue to grow.
Example: The price of Amazon.com, a company that continues to lose money (called Amazon Dot Bomb by Barron's), has no relation to its book value or profits (the old financial paradigm). Rather, its entire value is based on perception and speculation. In addition, Amazon is now building warehouses, inventory and bricks and mortar. Amazon has borrowed $2.9 billion on the bond market and cannot service the debt. What will happen? No one knows, but Amazon keeps expanding.
Hitting the Big Time - Two Choices and Two Models
What does this mean? Basically, a consultant can tell a client there are two choices and two models to follow. To be an overnight millionaire, it is possible to "go with the flow." The money is there for the taking. There is more money looking for a good deal than there are good deals looking for money.
Billions of dollars are currently being invested in anything related to technology: Internet DotComs, software, optical networks, etc. Most of this capital was created by the perceived values of companies such as AOL (America Online), Amazon.com, Microsoft, Ebay and Yahoo.
These early companies grew by simply trading their stock for others and adding some cash. An investigation of their balance sheets will reveal much of this available cash was floated on the junk bond market. This means they all have the cash to buy or fund a company with that borrowed money.
Depending on an entrepreneur's personal goals, he/she can build a company and become the next Jeff Bezos, merge into a larger group, or sell out and get their stock in return. Because there is no lock-up period for already public stock, it is possible to liquidate and be on the beach in Hawaii the next day. If instead the choice is made to stick around and continue to build the company, it could mean a three- to five-year wait for payday.
How to Structure a Deal to Build its Fundability Quotient
The Old Model - Three to five years of profitable operation, $1-5 million in assets, consistent growth with positive cash flow, and the money to be used for financing growth or acquisitions.
- The New Model - Six to 24-month-old startup, no positive cash flow, identifying and developing a small but potentially large focused market, with or without proprietary technology, unless the model is to get in first and go for market leader status.
The Next Step - Positive Cash Flow
Positive cash flow in the new model is the next round of VC funding, usually $6-$10 million. Latest studies show that four to 15 Internet start-ups are funded each week in Silicon Valley. Remember, however, that only about ½ percent of all deals are funded by VCs, so do not forget about technology companies, grants, and government programs as other sources for financing. There are at least 28 ways to finance a project.
What to Do
- For those just starting out, the first and most profitable activity should be to secure technology and domain names.
- Next, immediately begin to recruit a great management team, hopefully with a recognizable team leader and the key players: CEO, CFO, COO, and CIO. As the founder, fit into the most likely slot. The CEO slot should be reserved for the power player.
- Then, assemble a Board of Advisors (you can promise them one to two percent of the stock) that will attract Angels and VCs.
- Next comes the business plan and the attempt to get backing from a group of Angel Investors to get by the seed capital raw startup stage.
- Then, attract the proper legal and accounting team for additional credibility.
At this point, as the Entrepreneur, you should have approximately 60 percent of your stock remaining.
The Power of Positive Cash Flow
Next, finish the product and the Web site, and create cash flow. Present a stable product that shows a viable business, and have the killer application under development as the sweetener. This is building value, giving the leverage to get the larger cash needed to hit the jackpot.
Example: Michael Richardson, CEO of MP3.com, went from his home office to a billion-dollar company in 11 months. He did not take money from anyone. Instead, he developed an online business with Positive Cash Flow. While working from his home (he had no real office), he was approached by a VC who visited his site, and saw the potential. MP3.com was funded with $11 million within a month, then received a follow-on investment of $40 million in three more months. When they went public, it was the largest IPO ever.
Richardson had only a 12-page PowerPoint presentation and some financial projections that showed traffic growth for his site. Today, MP3.Com has 275 employees and is expanding into a 100,000 square foot office complex. During the IPO, his wealth grew to more than $600 million in one day.
What This Means to You and/or Your Client
An entrepreneur can follow this path if he/she is the leader in the field and the idea will fundamentally change a market. However, a follower in a field full of competition, such as auctions, shopping malls, medical sites, etc. will need a complete business plan, a big marketing budget and a lot of luck to attract capital.
Hint: The Business-to-Business model has not yet been fully explored and developed.
First published on April 17, 2000.
