No Exit

(Laura welcomes responses in the comment field beneath each blog entry).

During 2000-2008, virtually every private company’s investment oriented PowerPoint or Private Placement Memorandum  I saw (as Compliance Officer of a boutique investment bank), concluded with a “hockey stick” graph of escalating profitability, with a liquidity event in two years.   The magic number was always 2 years, regardless of likelihood, because this is what companies thought investors wanted to hear.  I cringe when I still hear that.  The liquidity event was usually posited as an IPO (initial public offering) with an occasional alternative of being bought out by a large public company.

 

To outline all the reasons I have long thought that going public early is a bad idea and an expensive mistake for small companies is another article for another day.  But here, I will outline why and how  small private companies are shut out from public capital, and what I think the liquidity options are in the near future for companies worth less than $50 mm.  

Initial Public Offerings  (IPOs)

The number of IPOs and their funding totals have declined as both the age and value of the companies has risen, raising the bars for companies considering this access to capital.  Statistics vary in frustrating ways for something that should seem so easily measurable, so consider the two following scenarios that follow the same trend line, but with different numbers. 

The first is documented in an informative RR Donnelly speech in March, 2012:  One long standing bar is that since 2003, the majority of those that launched IPOs were previously funded by more than $10 mm of venture capital. (So companies that haven’t already raised any outside capital might refocus their attention to growth first). Another is that the age of companies going public has risen from the rather ridiculous youth of 3-4 years in 2000-2002 to a more sensible 6-9 years of records, as was the norm in prior decades. The number of IPOs in each of the past three years has been about 100 – 150, raising $41-44 billion, far below the frothy years epitomized by 2000, with 446 deals raising $108 billion.  But even with this reduction in the number of deals, to companies presumably older and “field tested,” from 2004 to date, a sobering 22- 39% have not hit their offering price, despite heavy and expensive lifting by those companies’ marketing, PR, IR staffs and hired investment bankers.  They didn't mention the ones that withdrew after starting the process.
  
The second scenario, here gleaned from the excellent charts and graphs of  www.renaissancecapital.com of Greenwich CT, but that I have read elsewhere, too, shows much less volume. They count a measly 53 US IPOs in 2011, a precipitous plunge not only from 125 the prior year, but from a high of 486 in 1999. Perhaps unsurprisingly, the number of IPO withdrawals has increased in the past three years, from 48 to 52 to 67 last year.  (Did RR Donnelly use the start-out-the gate number?) The Jan-April withdrawals in 2012 are even with those in 2011.  The dollar volume raised by the IPOs differs, too.  These sources cite $97 billion in 2000 declining to $36 billion last year.  Both sources agree that the average age of companies making an initial public offering have aged, but the Renaissance numbers are MUCH OLDER than the others.  They identify the average age as 10 years in 2000, 15 last year, and 27 years old for those so far this year. 

GrowThink points out that the number of US IPOs since 2001 remain lower than the 1980s.    
The final barrier to entry is the value of the companies.  This is tough to assess, because pre-money valuations are usually described by those wanting to attract the money to prove the valuations!  Not a very virtuous circle.  But it appears that the market is not particularly interested in companies worth less than $50 mm and certainly not those less than $20 mm.  

Entrepreneurs who want to say, "we should go public" should instead do their homework to research and analyze the trend line and the differences cited here, before being swept into enthusiasm by service providers who will be paid no matter what happens once the bell rings. This summary doesn't even address the costs of going public and staying compliant, year after year, which is another topic to scrutinize carefully. 

My black and white recommendation is that if your company is pre-revenue, pre-breakeven, or even pre-$20 mm valuation, don't even think about an IPO. Doing so derails far too many companies from focusing on legitimate expenditures of time and money to grow market share, customer base, or profit margin. 

Local News: What Does it Reveal about Alaska?

(Laura welcomes comments through the comment field below each blog entry)

Whenever we travel, I love reading the local newspapers.  Each town and region has its own points of pride and subjects of division and derision from which a visitor or new resident can learn a great deal. Note the organization, relative coverage and topics featured repeatedly in its newspapers.  Such news can help to entrench or eclipse assumptions about the place. Clearly, Alaska thinks of itself as different from the rest of the US, as reference to “Outside” and “the Lower 48” indicate.  In several ways, this is very true.   

 What do the Alaska newspapers reveal about life up here?  To me, the primary impression from the Anchorage Daily News is one of a fully embraced outdoor lifestyle.  By way of example, consider this:  the “Outdoors” section of the on-line version (www.adn.com) includes the following permanent sections:  Bears, Excursions, Fishing, Iditarod, Mushing, Skiing, Snowmachining,  and Wildlife.  Readers are invited to submit photographs and there are whole galleries devoted to cabins, the aurora borealis, and “around Alaska.” By contrast, the Houston (Texas) Chronicle (www.chron.com) doesn’t even have an Outdoors section.  The only regular outdoor activity addressed is gardening).    

Two years ago, somebody or other surveyed Anchorigians regarding their satisfaction in living there.  Over 90% said that the setting contributed to their satisfaction.  Aside from the obvious fact that Anchorage’s setting, between the Chugach Mountains and the Cook Inlet, is one of the most visually stunning in America, the paper makes clear that residents enjoy its terrain, resources, and weather.  Everyone I meet in Alaska is happy to be here.   (By contrast, what might the percentage be in many other places?  Most people I know in Houston, TX, for example, say they live there “for the job” and plan to leave.  Complaining about some aspect of the city is a ‘warm up topic” at just about any gathering.)    I must say, it is nice to get away from the whiners!     

Easy, Free Due Diligence on Potential Service Providers, Clients, Employees

If you are a “glass half-full” person.  Read this carefully.  Dishonest people can be charming, or evasive, or manipulative, but all of them will waste your time or money.  “Trust but verify.”

If you are a “glass half-empty” person, you know to check out potential employees, service providers, investors, clients.  (I've even had friends who are utilizing dating websites ask me to check out people before they get too involved.)  The following list of liars and sources will save you time and reinforce what you naturally do to protect your business and wallet.    

                         

Below are two lists.  One is a list of lies learned from less than three hours due diligence of potential service providers, clients, investors and employees.  The other is a list of free or low cost public websites you can check to save you time, money, and “face.”  If you get a business card, a resume and take notes during conversations, you can ascertain a great deal in less than 3 hours of research, otherwise wasted by “big talkers.”   Some have been shameless liars who have, presumably, gotten away with this before, indicating that a lot of people DON’T do background checks. Think how much time you can save by learning this information early on. 

Preliminary due diligence is like a game.  The goal is to look for anything the person has told you (verbally or in writing, such as a resume) that is invalidated or contradicted in public sources.  If the person lied about something so easily discovered, what else might s/he lie about?  Red flag.  By asking for background information, the message you convey to the person is that it is “time to get serious.”   This can cut time wasted with big talkers.  Your time is worth money.

My First Snow Machine Ordeal (My Husband Loved It)

Bryan was probably as excited about his snow machine (same as a snowmobile in the Lower 48) as with his first tricycle at age 3.  (What is it with guys and powers of locomotion?  Residual memories of being ambulatory hunter gatherers?) When we returned home at 11 degrees outside to a 50 degree cabin and crawled, exhausted into bed with mugs of tea, he said with a sigh of great contentment, “That was a GREAT day.”  Noticing my stony silence, he put on his “attentive husband” voice and asked, as if winding up for a punch line in a comedy, “So which part of you was the coldest?” 

Snowmachine sled with building supplies
for future chicken coop

While Bryan felt like Nanook of the North, Man Merged with Nature, or Whatever, I felt like the Michelin Man on a bad hair day with a runny nose. Even with four layers of socks, pants, tops, and three layers of gloves, I got so cold that I shivered, teeth chattering for many minutes when we stopped at the only restaurant on the river for a mediocre hamburger (after 5 hours of being outside).  When we returned to the vehicle, maybe 30 minutes later, the wheels and tread had frozen up, and Bryan had to lie on the snow with a hammer and tap pertinent points on both sides before we could move.  Altogether, our round trip outing of 84 miles to get 750 lbs of gasoline (about 90 gallons) took 7.5 hours, about the time it takes to fly from Houston, TX to Anchorage, AK. 

I don’t know what heaven looks like, but I know what it feels like:  it feels exactly like the heated bathrooms at Deshka Landing after 3 hours on a snow machine across windy, bumpy terrain.

Arrival to Deep Snows and 15 degrees

While the lower 48 experienced a mild winter, the 2011-12 season brought record snows to much of Alaska.  Valdez and Cordova made national news with over 300 inches, but even Anchorage, which usually only gets about 5 feet of snow per winter, had double that amount by early March and expects to eclipse an historic record with the anticipated late season dumps of additional inches.  Several older commercial and church roofs have collapsed.  (I look askance at the number of flat and gambrel roofs, neither of which seems sensible in snowy country here.)   The snow berms around parking lots top building door height, and now that the afternoons are warming and the daylight lengthening, so too are the icicles, which from many eaves drip precariously two to six feet long, pointing toward unwary walkers on the sidewalks below.   Talk about the sword(s) of Damocles! 

We flew out to our cabin about 10 am, seeing four moose along the way.  Our goal was to make use of all the remaining daylight hours before sunset at 6:30 pm to get settled and to warm up the ice cold cabin before bedtime.  A cabin in the Bush is certainly not a turnkey operation.  Onto the frozen lake we unloaded weeks’ worth of supplies and a new piece of furniture, stationing them beyond the wingspan of the Cessna 206 ski plane’s turn radius.  The day was overcast but bright, and from repeated, recent snow falls, the snow was pillowy soft not only on the ground but also, since it was so still, in little bubbles of white remaining on the spruce and birch branches.  Once the plane took off, Bryan pulled on his snow shoes to tramp up to the cabin to retrieve the little plastic sled we use for hauling groceries et al.   

It has snowed so frequently this winter, and at such optimal temperatures for powder, that even in big, flat snow shoes Bryan sank 12-16 inches with every step.  When he couldn’t find my snow shoes, I knew I’d have a tough time traversing the snow in the boots I was wearing, but it had to be done.  Besides, at 15 degrees, my feet were getting cold so I was motivated to get to the cabin and start a fire.  Bryan carefully retraced his footsteps, stomping down with each foot to compress the snow further so I could follow more easily, but even so, the smaller footstep of regular boots caused me to sink below my knees with most steps.  Halfway to the cabin, huffing and puffing, I decided to crawl, in order to disperse the weight better across four limbs than two.  That helped.  Welcome home.              

 Once I stepped carefully across the spiky bear mat into the dark cabin, I was able to light a fire quickly in the woodstove, and feed it for about an hour with tinder and kindling to get a good bed of coals so larger chunks of birch wouldn’t suck up the heat and put it out.  In two hours, the cabin had warmed up from +15 to +40 degrees F,  but there the temperature sat for the next several hours.  I shed my gloves, parka, and hat, but retained three layers of socks and tops and two layers of pants as I went about my interior tasks. Someone told me that the log walls have to warm up before the air within can do so.  Perhaps that is the reason that it took the next five hours (!) for the temperature to inch up from 40 to 53.  Meanwhile, I started a ham and pea soup (with water brought from town) in a cast iron pot on the woodstove. My theory is that half of staying warm is smelling warm scents – like smoke from the chimney and cooking and the cider I offered my thirsty husband when he rested occasionally between a dozen round-trip sled deliveries.  Fortunately, he was able to retrieve all of the food before it started to snow.  We left the new furniture on the iced lake until the next day. 

All needs and wants are clearly triaged out here, and groceries are no exception.  First, Bryan hauled the foods most vulnerable to freezing, like fresh produce and eggs.  Once those priorities were completed, he left the products that could freeze and shifted to cabin projects.  As he unscrewed the bear shutters from all the windows, he brought in welcome light and the illusion of warmth. Packed down under its own weight, the fourteen feet of snow that had fallen in this vicinity reached about 8 feet high along the sides of the cabin.  Since this height is about even with the bottom of the first floor windows, Bryan was able to walk from window to window with a screwdriver -  making the task much easier than in the summer!    The lovely views of the frozen lake and the mountains beyond helped remind me of why I was enduring this chilly homecoming. 

Next, Bryan carved makeshift steps through the snow down to the back porch.  His goal was to clear away enough snow from the back door to remove the bear bar and mat and open the door to reach the ten days of wood we had piled next to it.  (The main woodpile is buried- a task for another day). Then he chopped steps down to the doors of the outhouse and the power shed.   He was relieved to find that the battery bank, which stores power from the solar panels and wind turbine, was fully charged.  In the outhouse, the toilet seat and top were frozen together and to the wooden bench below by a three inch deep circle of frost.  I eased up the seats, knocked off the frost and installed a two inch thick ring of Styrofoam, which we use instead of the wooden seat in the winter.  (The air pockets keep it from getting cold).   

  

Needless to say, we were tuckered out by early evening.  After a meal of Manchego cheese and easy homemade dishes of ham and pea soup, coleslaw, and bananas with a chocolate rum sauce, we tumbled into a very comfortable bed under a very thick comforter and a sound night’s sleep.  Tomorrow is another day.