I have seen things grow. My youngest cousin Jeremy was born when I was 12 years old. He is now eight years old and I remember when he started crawling, walking, and talking. I have watched my basketball team grow from a middle of the pack team, to a potential contender, to a team that won its final eight games in a row en route to a championship. When it comes to people and basketball teams, I can tell you how they will grow and what to expect. After spending my summer at AC Lion, learning from people like Alan Cutter, Mike Adler, and Giles Van Praagh, I have developed a strong understanding of startup growth and venture capital.
The progress of a startup company is extremely dynamic and exciting to follow. Once someone has an idea and makes the decision to try and turn it into a company, you need money to get started. In most cases, they will turn to family and friends to get their angel funding. An entrepreneur will either take on debt or give out percentages of equity in exchange for capital. Debt can come in the form of a loan or a convertible note. In the case of a convertible note, an investor will receive equity if they have not been repaid at the loan’s maturity date. This is an important milestone because you will have your first company valuation. If you choose to issue equity, value your company at $1 million, and need $100,000 in angel funding, then your company valuation after receiving funding will be $1.1 million, and you will have given away 1/11 of the equity of your company.
All startups need to have an exit strategy. Either they will keep going through rounds of funding until they go public, or they will try to find a niche in an already developed market and work towards a merger or acquisition. Facebook held its IPO on May 18, 2012, the biggest ever for a technology company. Mark Zuckerberg adeptly navigated his company from a Harvard dorm room to an IPO, resisting the temptation of selling to both Viacom and Yahoo. Facebook has acquired numerous companies, most notably, Instagram for $1.01 billion. As Instagram’s user base exploded, Facebook quickly moved to acquire the photo-sharing platform. Facebook’s path to an IPO was not as smooth as most assume. In Facebook’s 2007 Series C round of funding, Microsoft purchased a 1.6% stake for $240 million, giving Facebook a valuation of $15 billion. In Facebook’ 2009 Series D round, Digital Sky Technologies bought a 2% stake for $200 million, dropping Facebook’s valuation down to $10 billion. A decreased valuation hurts the position of everyone with a stake in the company. Following their Series D round, Facebook’s stakeholders watched their holdings drop to 2/3 of their prior value. Facebook has since rebounded nicely, however a less developed company can go under following a decreased valuation. A decreased valuation is one of the many ways that a startup can fail. An article published on Business Insider last June captures nearly all of the paths to failure for a young company. The exit strategies, or lack thereof, these companies planned to carry out simply failed, as is the case with most startups.
Tremor Video and Yume are two smaller scale companies, prominent in the digital media space, which recently went public. Yume’s shares first began trading on the NYSE on August 7, 2013. They were strategically priced at $9, well below the expected range of $12-$14. This came in response to Tremor Video’s disappointing first month since going public. Tremor Video held their IPO on June 27, 2013 and priced each share at $10. Less than 2 weeks later, share prices had dropped as low as $6.81. Shareholders are anxiously anticipating Tremor Video’s announcement of their Q2 earnings. This will allow accurate for predictions of thee company’s outlook. Yume, hoping to avoid similar concerns, saw their stock price close their first day right where it started. So far so good for Yume; they hope their growing profitability will lead to large returns for investors.
Yume and Tremor Video are part of the extreme minority of companies that are fortunate enough to file an S-1. A startup realizing its exit strategy is just like winning a championship in an 18+ Men’s basketball league at your Jewish community center. That is the goal, and you need to grow before you can get there.
As I write this final paragraph, I am just an hour away from the end of my summer internship with AC Lion. It has been a great ride, giving me exposure to the digital media world that I was always close to, but was never a part of. At AC Lion, I was a part of something. I grew close with the interns, working on various projects together. I learned a lot from my bosses/mentors Alex Yee and David Carona aka Doc Knowledge. I owe them a lot and look forward to keeping in touch with everyone at AC Lion.