August 21, 2018  
 
Gaebler.com is a daily online magazine covering small business news. We help entrepreneurs transform ideas and innovations into greatness.

Small Business News for Entrepreneurs

 

Small Business Startup News

 

For IPO Valuations, Leave Revenue To The Imagination

Written by Ken Gaebler
Published: 9/11/2009

Paradoxically, promising startups can actually receive higher valuations before they generate any revenue.

For an entrepreneur, news of companies such as Twitter and Facebook getting soaring IPO valuations without actually making any revenue can seem not just frustrating, but counterintuitive.

Entrepreneur Open a Business

Yet according to TechCrunch, this phenomenon - dubbed the "revenue dilemma" - is actually quite common.

This is because a company that does not have any actual revenue numbers can rely on other factors - such as its hype, in the case of Twitter and Facebook - to create essentially imaginary revenues.

In other words, the lack of revenue leaves the potential revenue amount to the imagination.

"When you don't have revenue you can't be valued based on a multiple of revenues," TechCrunch reported. "For most companies that means you probably won't be acquired. But if you happen to have invented something new and dominate the space (Hotmail with webmail, YouTube with online video), you can let the market speculate about your potential revenues and potential profits all day long."

However, once a startup starts actually producing revenues, its valuation can actually decline.

Therefore, startups with an eye on an IPO should not stress about generating revenue immediately - it can actually hurt their cause.

Startups looking for high IPO valuations should also consider angel investment seed money, as a recent report from the Center for Venture Research at the University of New Hampshire found that IPO valuations tended to be higher for firms backed by angel investors, as compared to those backed by venture capitalists.

Have Friends Who Might Like This Article?

Tweet via @gaeblerdotcom Share this on Twitter

Let them know on LinkedIn

Ready to Learn More? We Think You Might Like These Articles:

 


About Our Breaking Small Business News

Our reporters publish news articles for entrepreneurs five days a week. Our small business news articles review trends in business management, analyze the impact of new government policies, present relevant entrepreneurial research findings, and cover many other topics of interest to entrepreneurs.

 

 

Additional Resources for Entrepreneurs

Help for Native American Entrepreneurs

Resources for Gay Entrepreneurs

Businesses for Sale

Online Entrepreneur Tools

Economics

Lists of Small Business Incubators

Lists of Angel Investors