The public market is for grown-ups, for companies that can support themselves. Directly or indirectly, all growing companies arrive at the public market. It’s an initiation, and what takes place on arrival is critical. The steps to that point follow a sequence more or less like this one: An entrepreneur develops a new business platform… The entrepreneur requires capital for his idea to evolve… Venture capital investors consider financing the opportunity… A venture capital syndicate funds the project… The business plan is implemented, corrected, executed, modified, grown, and etc… The venture capitalists want their money out and seek to “exit,” pursuing M&A and IPO options… The M&A market looks to the IPO market to benchmark a valuation, qualify interest, and determine the seller’s true alternatives… The public market responds.
If this market is receptive and constitutes a viable exit option for the venture group, then we can reverse the sequence, starting with good public market response… to an upright M&A market… to venture funds that realize successful exits (using either option)… to venture funds that have the resources and courage to make new investments… to entrepreneurs who can efficiently raise capital for their ideas… to innovation and business building as a lucrative pastime for entrepreneurs. If, however, the IPO market fails us, then revisit the same order one by one for a less desirable set of circumstances. A lot depends on the public markets, and all involved are watching closely.
Now, the public market is very particular, and much of what digital media has to offer nowadays does not fully resonate there. Unlike the private, in which deals are done and values are set in ways that are sometimes beyond science – a story that strikes a chord with a certain individual, a story that fits a certain theme at a certain time, a CEO who knows the cousin of the man in charge, a syndicate that picks up newcomers because of the syndicate’s composition – the public market is more rigid and yet more volatile. The story is important, but the CEO’s cousin less so. And even the story has its limits, as public investors could at any moment be distracted by some other. There is no shortage of stories among thousands of tradable securities, and this market would appreciate it if you would get to the point and highlights:
What is the market cap, what is the float, what is the valuation benchmark and how does this relate to a broader peer group, how do next quarter’s earnings look… Monthly uniques, you say? Yea right, that’s good, whatever… A new “retweet” button integrated with geolocation social mapping that tracks back to a family tree? If you say so, sure, you know your business best, but what’s the EPS bump from that in fiscal 2011?… For grown-ups, like I said, and no messing around.
With this in mind, where are the answers going to come from in digital media? The sector leaders – those companies that should serve (if you will) as mature role models – are still in a state of infancy. Twitter has no official business model, let alone sustainable revenues, let alone profit. Facebook has revenues and profit, but nothing that would rationally justify its private market value in a public transaction as the company continues to iterate and set new goals and try to figure out what it will be when it grows up. Even on the public side of the playground, GOOG is busy not being evil and goodness knows what else is keeping GOOG busy anymore. AOL is busy transforming itself. YHOO is busy keeping its head low and avoiding the others.
Until these bigger boys begin to demonstrate some of the qualities that make for successful grown-up companies, the public markets could remain less than reliable for all. And projects of lesser presence than Twitter may underwhelm their sponsors in need of exits. Leadership is important in all realms, even in whole sectors. We continue to look.
Disclosure: No positions.