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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.

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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.

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