The lead item on today's Venture Wire Alert (free sign-up here Venture Wire Alert) noted venture and private capital funds are now very big, and the trend continues. They are the giants with the money you need to fuel your growth to IPO.
So what does that mean for your startup?
The answer is simple: Your sales in Year 5 have to be much larger than you might expect, in fact, about one zero larger.
For instance, Wall Street will typically give your hot startup at least $4 of stock value per $1 of annual revenue at the time of your IPO. To generate $100 million of stock market wealth that would mean you need $25 of revenue.
But in today's market, a $100 million IPO is small. The big institutional buyers of IPO stocks now expect 5 to 10 times that valuation. One reason is that size produces more shares to trade, making it a "less thinly traded" stock, thereby reducing the volatility of the share price in the after-IPO market.
So now a startup needs to paint a picture of its financial future containing 5 to 10 times more revenue by IPO time (Year 5 for IT companies and Year 10 for life science companies). Sales need to be in excess of $100 million to get VCs eager to reach for their checkbooks after your presentation.
That is a very large number for many entrepreneurs. It is a hurdle that cannot be leaped over by many a well-intended startup founder. But it is reality.
Yes, some companies will always get to IPO with less revenue. Explosive future sales has been and will continue to be able to be sold to Wall Street. But that is increasingly the exception.
BOTTOM LINE: How can you modify your business model to get your sales by IPO day close to $100 million? When you have figured that out, you will have greatly increased your chances of getting the venture capital backing you need to get there. That refined business model can be a powerful addition to building your unfair competitive advantage.