Welcome to Tuesday Terms, where every Tuesday we break down a business buzzword from the perspective of every day non-tech businesses.
We’ve spent a lot of time talking about marketing terms like churn and bounce rate, but today we are excited to take things in a different direction.
Every entrepreneur should start their business with a destination in mind. Where does your business need to go for you to meet your goals? Will you run the business until you die? Will you sell the business to a child? Will you take the business public by an IPO or SPAC?
All of them are viable options, and could be smart depending on the type of business you run and your own personal wealth goals.
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Most non-tech businesses will not want to explore the IPO or SPAC route, but it’s important to understand all the options for your business.
IPO
An Initial Public Offering is when a company uses a public market to sell shares of their business. Often companies that have raised large amounts of funding from angel investors or venture capitalists will “go public” via IPO to help their investors realize gains on their investments.
IPOs are highly regulated by the Securities and Exchange Commission(SEC) and there are tons of rules to follow when taking a company public. There are always companies who try and cheat the system and end up committing fraud. For example:
Theranos(more on this later)
Bernie Madoff(former chair of the NASDAQ)
And of course, Dunder Mifflin
The CEOs of publicly traded companies are often under immense pressure to keep the shareholders happy and ensure the business is profitable. There’s a stereotype that all CEOs of public companies end up divorced from working so much trying to keep the company running smoothly.
If you want to understand more thoroughly how a company can go through the early stages of funding, product development, and end with massive fraud, we highly recommend this book by John Carreyrou. It highlights the real world story of Theranos, and how they ended up stealing from millions of investors and generally building a terrible business.
While you should always look for examples of great businesses to emulate, it’s also important to learn about businesses that have made mistakes so you can learn from them.
SPAC
A Special Purpose Acquisition Company is basically a group of companies that go public together as a group. SPACs have been around for years but recently had a big upswing in popularity in 2020 and 2021.
They’ve mainly been a low interest rate phenomenon and haven’t been used as much in 2022 and 2023.
In general, SPACs do not perform very well.
During 2021, 613 SPACs went public. But by the end of the year, 70% were trading well below their initial prices and the market outperformed them by a whopping 42%.
Generally it seems that SPACs are ways for the rich to get richer by providing liquidity events to the owners of the businesses and the investors that make the SPACs happen.
This is not an investing newsletter, and we don’t give financial advice. You’ll never see The Steel Road invest in a SPAC.
What does all this mean for your non-tech business?
There are lots of options to build towards. Knowing the possibilities and understanding how to structure your business is very important. Perhaps even more important is knowing how NOT to structure your business.
“You can’t win until you keep from losing.” -Bill Belichick
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