Sunday, November 15, 2015

The Startup IPO vs. The Established

In this land of amber waves of grain, one look at the above chart and it is obvious; investors should plant all their money into IPOs rather than established companies…or should they? Hmmm…I think financial farmers know a thing or two about what REALLY constitutes a viable business. Is an established company going public or has a company been established to go public? Those are two different things indeed; one is wheat, and the other chaff.

Established companies going public typically have significant track records of EARNINGS and increasing revenues. They may have been in business for years, if not decades. They have the three "Cs" locked up; cash, competence, and clients. This actually is a business that generates positive cash flow, has barriers to entry, and a validated business model. Many investors consider them boring businesses.

The flip side of this IPO coin, however, is the company with a limited track record, possibly increasing revenue (but no profits), and concentrated ownership with shocking compensation numbers. They often have complex business models with "new" metrics outside of GAAP (Generally Accepted Accounting Principles.) They are generally NOT considered boring by any means; indeed they are often labeled "disruptive."

These are two different scenarios indeed, and if you separate the proverbial wheat from the chaff, financial farmers will find that the former typically are actually established companies making a debut onto the public markets, while the latter are in fact dumping grounds to get founders, VCs, and banks paid on the backs of retail investors.

Make sure you're buying wheat, and not the chaff, as more and more companies come to market due diligence is essential.