The Initial Public Offering or IPO holds the distinction as one of the few terms that has made the transition from the world of investment banking to the common man’s vocabulary.
An IPO is the first offering of a company’s shares (also known as stock or equity) to the general public. Most companies are structured in a way that ownership is determined by holding shares. Shares can be seen as small slices of a company and therefore it’s earnings. So when a person holds a share of a company (a shareholder) he is effectively part owner of that company. Companies are usually started by entrepreneurs who initially own the entire shareholding and then raise money by offering shares to investors. This is one of the most popular ways to raise funds for companies that are mature and well established.
So, to illustrate, initally the shareholding of a new company looks like this:
| Shareholder |
Shares |
Percentage |
| Founder |
100 |
100% |
| TOTAL |
100 |
100% |
After the founder raises money:
| Shareholder |
Shares |
Percentage |
| Founder |
100 |
80% |
| Investor |
25 |
20% |
| TOTAL |
125 |
100% |
Notice that the total number of shares of that company have now increased to 125 and the investor owns 25/125 which is 20% of the company.
An IPO is an extension of this concept. Instead of a single investor, a large group of investors invests in the company and shares are issued to them. This group includes retail investors (small investors like you and me), institutional investors (large mutual funds, banks etc), High Net Worth Investors (HNIs - basically rich people) all of whom invest in the company and receive shares for the cash that we give the company.
| Shareholder |
Shares |
Percentage |
| Founder |
100 |
50% |
| Investor |
25 |
12.5% |
| Public |
75 |
37.5% |
| TOTAL |
200 |
100% |
These shares then get listed (traded, quoted) on a stock exchange and can be freely traded. Once a company is listed, its value is determined by the number of outstanding shares (the 200 total shares mentioned above) times the price per share. This value is called the Market Capitalization or Market Cap.
The upside of an IPO is that it usually allows companies to raise far more money than through a private investor. For investors, the fact that shares are freely tradable means that they can sell out at any time (this ability is called liquidity of shares). The downside is that since the shares are being offered to the common public, the level of control over the company by regulatory authorities (SEBI in India) is hugely increased to ensure that unsophisticated investors can be fully informed of the company’s status, unlike in a private company where investors are considered sophisticated and the oversight by authorities is much lower.
Hopefully this provides you with some insight on what an IPO is and how it works. We will continue the basics of fundraising as a series.
“In the middle of every difficulty lies opportunity.” Albert Einstein
One of the most popular words in the business dictionary is opportunity. We are always searching for or waiting for or wanting the right opportunity.
An opportunity is not an illusion. It is the chance to do something in a way which is both different from and better than the way it is done at the moment. It offers the possibility of delivering new value to the customer.
Every opportunity is different, but there are some common patterns in the way in which they take shape.
Types of Opportunities: (Wickham, P.A. (2004) Strategic Entrepreneurship. FT Prentice Hall)
1. New Product:
It offers the customer a physical device which provides a new means to satisfy a need or to solve a problem. It may be based on existing or new technologies. It may also give you a chance to add value to an existing product by using branding strategies.
2. New Service:
A service can quite simply be seen as an intangible product. It offers the customer an act, or a series of acts, which satisfy a particular need or solve a particular problem.
3. New means of Production:
Producing an existing product with a new means is not an opportunity in itself. It will offer an opportunity if it can be used to deliver additional value to the customer. The new means should allow the product to be produced at lower costs or in a way, which allows more flexibility in the way it is delivered to the customer.
4. New Distribution Route:
A new way to get the product to the customer means that the customer finds it easier, more convenient, or less time consuming to obtain the product or service. E.g. USA based company Federal Express started with this very idea and today it is worth US $24 billion.
5. Improved Service:
This is an opportunity to enhance the value of a product to the customer by offering an additional service element with it. It often involves maintaining the product in some way but it can also be based on supporting the customer in using the product or offering them training in its use.
6. Relationship Building:
Relationships are built on trust and trust adds value by reducing the cost needed to monitor contracts. Trust can provide a source of competitive advantage. It can be used to build networks which competitors find hard to enter.
Opportunities rarely exist in isolation. You will often discover opportunities that are made up of a mixture of the above types. It is often assumed that entrepreneurs have some special skills that allow them to see opportunities. Finding the right opportunity can be challenging, even for experienced entrepreneurs. The ability to spot this opportunity and take advantage of it is what separates successful entrepreneurs from the rest.
How to Identify Opportunities:
1. Problem Analysis:
Start by identifying the needs any individuals or organisations have and the problem that they face. You need to ask questions like ‘what could be better?’. Once you’ve identified a problem, the next question is ‘how might this be solved?’. Finding a solution (to a problem) that works represents a new opportunity for the entrepreneur.
2. Customer Proposals:
The customer himself may spot a new opportunity by recognising his/her own needs. The customer then offers the opportunity to the entrepreneur. This can simply be a suggestion like ‘Wouldn’t it be great if you could…’ or can take a form of a detailed and formal brief.
3. Creative Groups:
Creative groups consist of small number of potential customers or product experts who are encouraged to think about their needs in a particular market area and to consider how those needs might be better served. They can provide useful information/insights which you can use as opportunities.
4. Market Mapping:
This is any study conducted concerning attitudes of consumers, product comparisons, or marketing evaluations, or any combination of marketing factors, where the results are charted on a graph to show a correspondence among variables (wherein one variable is dependent on another and a change in one will effect a change in the other).
5. Features Stretching:
It involves identifying the principal features which define a particular product or service and then seeing what happens if they are changed in some way. The trick is to test each feature with a range of suitable adjectives such a ‘bigger’, ’stronger’, ‘faster’, ‘more often’, ‘more fun’ and so on and see what results from this testing.
6. Product Blending:
This is similar to feature stretching and involves identifying the features which define particular products. Instead of just changing individual features, new products are created by combining together features of different products or services.
You (the entrepreneur) can’t rely on inspiration alone. Encourage people around you (like employees, customers, technical experts etc) to be creative on your behalf. The above methods are not exclusive to each other - they can be used together. Try to use them in a way that helps you to identify new and unexploited opportunities. Don’t keep waiting for it to come knocking at your door (it rarely does). Remember, “One man’s problem, is another man’s opportunity”.
In my previous post, “Business Plan: The Core of Entrepreneurship” I wrote about how you should start making a business plan to sell any business idea that you have. And if you’re selling, somebody will have to buy it or in other words finance it.
Getting a new venture financed can prove to be quite a challenging task. However great your idea is, you have to be able to use your business plan effectively in order to convince that someone to buy your idea. I will subsequently write a post on perfecting your sales pitch etc. but for now lets just understand where your finance could potentially come from:
1. Your Own Money:
This is the easiest and the toughest option. Easiest because it’s your own money, may be what you have saved over the years, it is your choice what you want to do with it and you can have instant access to it. Toughest because this might be your hard earned money that you have saved over the years. Would you be willing to take a (calculated) risk? How strongly do you believe in your idea? How good is your business plan?
2. Informal Investors:
This is money from friends and family. Their expectations on returns on their money etc. are usually set informally or sometimes semi-formally. Personal trust would play a big part here.
3. Business Angels:
These are individuals or a group of individuals, who offer up their own capital to new ventures. They differ from ordinary investors in a way that they like to get involved in the venture; besides the finance they offer their skills/insights/experience/expertise, which can prove to be invaluable to you and your new venture. In return they will demand a share in your company.
4. Retail Banking:
They are banks that usually offer investment capital to new ventures and expanding small companies. They are cautious investors and would demand a personal commitment from you in terms of a collateral that is something pledged as a security for repayment of their investment. Minimizing their own risk will be priority for them.
5. Corporate Banking:
They are interested in bigger investment opportunities and may settle for longer-range returns. They would loan the money in a way similar to the retail banks but some equity or share in the company might be offered. Again a collateral would be required.
6. Venture Capital:
This is one of the critical sources of investment for fast-growing new ventures. Venture Capitalists (VC) usually seek big investment opportunities with potentials for a fast and high rate of return. They therefore take more risks than banks. They insist on a clear exit strategy that enables them to quickly liquidate and recover their investment. They are one of the most aggressive types of investors and can be challenging to handle.
7. Public Floating:
This is a means of raising capital by offering shares in the venture to a pool of private investors. These shares can then be bought and sold in an open stock market. There are special stock markets for smaller business and for fast-growing ventures. The most important European small company stock market is AIM (Alternative Investments Market) based in London. Public floating is a popular option but a big no no these days due to weak global sentiments and already crashed stock markets.
There are a few more options available like the government, commercial partners and internal capital networks. The seven listed above are the key ones according to me.
When the time comes for you to choose from these options then the following questions will help you:
- What is my idea?
- How much money does is require?
- What stage of development is it in?
- What are the risks it presents?
Let me tell you something, there is no such thing as a perfect idea. DO NOT get married to your idea. What I mean by that is - be flexible. Feel free to discuss your idea with your friends and family or anyone who you think will help you to improvise on it and then fine-tune it accordingly.
There are good ideas and bad ones. Similarly, there are good business plans and bad ones. Sometimes bad ideas presented well go through to the end and good ideas fail to impress. Your aim should be to get the basics right and success shall be yours.
Eureka! You’ve got this great business idea. The next iPod or whatever and it’s going to be bigger and better, you are going to be rich and famous…OK! STOP dreaming! And start working on the first thing that you’ll need to sell this ‘great idea’ - THE BUSINESS PLAN!
This one is a logical follow up to one of my previous posts, “Are you an Entrepreneur?” because a business plan is one of the most essential tools that an entrepreneur can possess. It can also prove to be one of the most challenging concepts to master. For anyone looking to become a successful entrepreneur it is crucial to understand all aspects of a business plan. My attempt is to present you a simplified series of posts that tell you all that you need to know.
Definition: a business plan is a summary of how a business owner intends to organize an entrepreneurial venture and implement activities necessary and sufficient for the venture to succeed.
Role of the business plan: Making a good business plan takes a lot of time and effort. In most cases, a business plan is created to explain and illustrate the vision you have for your business, and to persuade others to help you achieve that vision. To accomplish this, your plan will need to demonstrate on paper that you have a firm visualization of what your business is going to be. It needs to convince others that your business concept can be successful, and that you possess the expertise-alone or collectively-to assure that it will be both successful and profitable.
While it is obviously important to be able to present your business concept in a way that allows others to understand quickly and precisely what you hope to be doing, you also need to develop a business plan for your own use. The process of developing your business plan will require you to focus on exactly what you are trying to achieve. (Bellissimo Coffee Infogroup)
This brings us to the three most important questions in business:
1. Where am I now? (’I’ here is the business/idea/concept/company)
2. Where do I want to go?
3. How am I going to get there?
Add these three questions to your business Bible. Not only will they guide you to make a successful business plan but they will also become your strategic allies while planning the future of your company at any given point of time. Businesses all over the world pay millions to consultants to draw up the answers to precisely these three questions. I will soon write a post explaining these questions in more detail.
What your business plan should include:
There are no fixed things that a business plan should include because it must be shaped to reflect the needs and requirements of the venture it represents. The information included will depend on the stage of the venture in question. A plan for a new venture will obviously be more detailed than for a yearly plan for an already established business. (Wickham, P.A. (2004) Strategic Entrepreneurship. FT Prentice Hall)
Your plan should reflect the information required by the people to whom you are presenting to and it should clearly show what you want from them.
The following is the skeleton of what a business plan should include. I will post an example and a template of a business plan, which will make it easy to understand and use:
1. Mission - this is the formal mission statement that defines the business, what it is, what it is aiming to deliver, to whom, why it makes a difference and what it aspires to achieve.
2. Overview of Key Objectives:
a. Financial objectives: the turnover and profits for the period of the plan; the growth desired over the previous period.
b. Strategic objectives: achievements in the market and gains to be made in market position.
3. The Market Environment:
a. Background to the market
b. Competitors
c. Competitive conditions
d. Competitive advantage of the venture
e. Definition of product offering
f. Definition of target markets
4. Strategy:
a. Product strategy
b. Price strategy
c. Distribution strategy
d. Promotional strategy
e. Networking
5. Financial forecasts:
a. Income
b. Routine expenditure
c. Capital expenditure
d. Cash-flow
6. Activity:
a. Major projects
7. People:
a. Key players in the venture
It is the lack of understanding of the business plan that causes many people to run away from it. Remember, the business plan is a powerful tool and an asset to you. When used effectively it can help to soften the toughest of investors/venture capitalists/banks etc.
There is so much more that I can’t possibly cover in this post. Look out for much more on this…
Your idea is the seed; the business plan is everything that goes into nurturing and developing that seed
Update: Also read “Who will finance your ‘Great Idea’?”
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