Risk is quantifiable – such as the risk that a biotech company’s clinical phase II trial will fail – but with uncertainty you hardly even know what you don’t know. And those periods of hard-to-quantify uncertainty happen in every growth company’s life.
Here’s a typical scenario: Company A has spent a decade developing a promising product, supported by patient angel investors, family, and friends. Now, they’re looking to raise substantial funds in an IPO to finance its commercialization and take the product to market. Sound familiar?
The problem with this scenario is that any market entry, especially with a disruptive new product, is the very definition of uncertainty. It is extremely difficult to predict with any degree of accuracy how quickly a new product is adopted on the market, whether the chosen sales channels will be effective, which commercial model is most appealing to potential customers, or how the incumbents will react. There are just too many things most companies don’t know, and simply cannot know, in this transition phase. You are going from a controlled environment – the lab – to something entirely different: The real world.
But let’s just say you have decided to go public anyway. Maybe it’s the only way forward, maybe the listing itself will support your market entry, there could be any number of legitimate reasons. The problem is that many companies will now, even in the face of this uncertainty, make sales predictions an integral part of the investment case in their IPO communication: “We expect revenues of 5 million this year, and 20 million next year!”
This is almost always a mistake. A better strategy is to be honest with the investors. Tell them that you simply don’t know enough at this stage. And then make them understand that your company will still be creating tons of value for them even if it does not show up in your accounts just yet.
Every new contract signed, every patent granted, new agent agreements, successful trade shows, additional geographies addressed, all of this is newsworthy and can help drive interest in your newly listed stock. The message is: “Yes, we are done developing the product – hooray! – but now we are developing the market, and it may be a year or two before we are ready to make sales predictions”.
You think this is unrealistic? Well, look at the biotech sector. Biotech companies – notorious loss makers for years and years – are experts at driving investor interest with non-financial expectation management. You can too.