Shareholder Value

Day 285 Week 41 Q4 Friday, October 13, 2023

After you have something of value to deliver, you may find the stakeholders you are now working with have become different. You see, the people who are good at making things are not necessarily good at selling things. The converse is also true. The people who excel at selling do not always know how to make anything. Suppose you are moving from the traction phase to the scaling phase. A corporation may be formed, and you may find yourself as the CEO.

As CEO, you may be taking literally the concept of maximizing shareholder value. Here is where I made a rather large mistake. I focused on short-term shareholder value instead of long-term shareholder value. I was also such a neophyte that I had not yet learned that the early small fry friends and family investors did not really determine valuation.

As an under-thirty-year-old first-time CEO, I was quite full of myself and thought I knew much more than I actually knew. I had gotten our first investor for the relatively small sum of $20,000, and remember, this was more than 40 years years ago when $20,000 was still something. From this initial investment, I thought I could derive a valuation. Simple calculation, right? $20K for a few percent of the company and then multiple to bring it up to 100% to determine the value of the company.

Well. I quickly learned that valuations are determined by large, not small, investors when I found two larger investors who had their methods and calculations to determine the value of a fledgling company. Now., at the time, I was not even clear what the difference between a small and a large investor was or how many different investments might be necessary, and this is a moving target.

But back to shareholder value. Both of the potential larger investors had strategic reasons to invest. They made hardware, and we had a large, complicated, and expensive software package, which we sold for $25,000, that ran on minicomputers. The personal computer had barely been invented at the time, so computers were still million-dollar things, not thousand-dollar things.

Investor A was a large company that told me it had deep pockets and would be capable of investing in subsequent rounds of financing. The other offered more per share but was much smaller. I thought I was a good CEO by going with the larger valuation determined by the smaller investor. But the other reason was an ego reason. The larger investor basically defined a trajectory by which I would be bought out and ejected from the company in a few years after more rounds of financing when I would no longer be qualified to run the company. 

In my youthful arrogance, I rejected this smaller offer partially due to valuation but equally to being kicked out of my own company without realizing I was being offered an exit, which would have permitted me to retire in my early thirties. The two large lessons are long-term shareholder value and do not let your ego get in the way of your success.