Today I scanned the Wall Street Journal's list of Best Performers in the IPO category for 2007. What stood out was the absolute size of the IPO cash raised in each IPO. In the giant-sized group were MasterCard ($2,579 million raised), Spirit AeroSystems ($1,647 million) and Hertz ($1,323 million). Those made investment bankers rich but were not from startups. They came to IPO as established businesses sold by parent corporations. However, they influenced the IPO market and made very large deals acceptable to the professional institutions who have tons of money to invest.
But real startup IPOs were also unusually large. For instance, Riverbed Technology raised $98 million. Vanda Pharmaceuticals received $59 million in cash from new investors. The old target at IPO was for your total company to be worth at least $100 million. Now we can expect your IPO to be looked down on if the cash to be raised is less than that! If the holders of new shares sold at IPO end up owning 10 percent of your company, the entire corporation would be worth $100M/10% = $1 billion. One more zero than the former $100M. That is a much larger figure.
VCs are generally not dumb (a few however do insist on behaving that way). They see the eagerness of giant pools of money for IPOs and thus have begun searching for startup ideas that could be "humongous" at IPO (read that to mean worth a billion dollars or so). One young VC I respect has worked out a method of turning ideas with clever founders into $100 million follow-on offerings that are headed for the billion dollar IPO in less than five years. This guy is on to something. Think about it as an investor: Would you be smart to spend your limited time on the board of a startup hoping to go IPO at $100 million or a $1 billion?
It is easy to count on getting $4 of stock market value for every $1 of sales of your company. Some hot Internet companies are currently getting x15 to x20. So if the number is at least a multiple of 4, you will need sales at IPO time of at least $250 million to get investment bankers eagerly knocking on your door (pounding it down is even better). At x20 you would need less, $50 million of sales.
A decade ago, $50 million of annual sales for a new company was considered to be a large number. But I sense that large has become the new name of the startup game. The amounts of cash raised by the VC firms is much higher than a decade ago. It has to find a home. More large deals is one way to do that.
BOTTOM LINE: The implications of the Law of Large Startup Numbers is simple. Look for a business idea that can go to $50 million in sales within five years. For life science, the $50 million remains the sales figure, but the number of years is ten. Think large. Very large. Times have changed.
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