Stock markets and economies around the world are extremely cyclical. Human nature dictates that markets will be overbought and oversold with unerring regularity. In light of the 2008 US mortgage crash we saw one of the worst economic downturns in living history. Stock markets collapsed, economies dried up, banking systems froze and the end seem to be nigh. Fast forward a decade, stock market are flying high, economies are starting to pick up although it has to be said this is based on cheap finance with historically low interest rates. In light of this extreme volatility many people assume that start-up funding can be difficult to find.
Quality ideas always attract funding
If we look at the emergence of the likes of Twitter, Facebook and other social media giants over the last 20 years, it is fair to say that quality ideas do still attract funding. Despite the fact these companies have raised billions of dollars in funding they have not necessarily been profitable for that long. In some ways this does show the difference between start-up investment and stock market share price movements.
There are literally hundreds if not thousands of other quality start of companies around the world which have attracted funding from some of the best known names in business. Those who have an idea, a concept or a service which they believe has the potential to be huge should not be put off by volatile markets. On the flipside of the coin, in difficult times start-up funding can be “relatively expensive” compared to valuations in more buoyant times. That is perhaps the only proviso to take into consideration when looking at start-up funding.
For many a stock market listing is the end not the beginning
Over the years we have seen a number of high-profile investors either reducing or selling their entire stake in previous start-up operations. Facebook is perhaps a prime example with many private funding arrangements along the way and then the creme de la creme, a listing on the New York Stock Exchange. We saw some of the founding shareholders banking a profit and bailing out. We saw the likes of Mark Zuckerberg reduce his stake but retain a huge interest in the company. Traditional investors see a listing on the stock market as the beginning of a new future while many start-up investors see this as their prompt to exit side stage. Pocketing some significant returns along the way!
Start-up takeovers
The world of technology and social media is littered with companies that received takeover offers prior to flotation on the stock market. The likes of Snapchat were courted by Facebook for some time but unable to agree a price. The takeover of start-ups which have not yet listed on an international stock market offers a significant degree of risk to all parties. Will competition emerge? Is further funding required? Does the takeover price offer value for money?
Often one of the major barriers to taking over start-ups with potential for the future is an inability of founders to let go. They may be correct in their assumption that there is more growth to come but unfortunately blind faith and the reluctance to cash in their chips has led to many potentially great start-ups falling by the wayside – disappearing, smashed to pieces and riches ripped to shreds.
As the song goes, “you have got to know when to hold them, when to fold them and when to walk away”.