With the recent downfalls of several prominent 3D printer companies, I thought I’d explain the involvement of investment companies.
We’ve seen this happen with several 3D print companies recently: a promising startup with a compelling message, private investment occurs, a listing on a major stock exchange, and then a gradual diminishing of company value until it gets so low that the company fails or is acquired at a bargain basement price.
What’s going on here? How does this happen?
I believe a lot of the cause is all about how corporate investment works.
When companies are small, one of the most important factors is funding. Cash allows them to expand. Even if they have fully developed a salable product, it requires a lot of cash to sell it. You need to pay for sales staff, setting up reseller networks, advertising, regional coverage, international expansion, maintenance services, spare parts, and a ton more.
It’s not just about building the machine, it’s about selling it to customers that are confident in the company and its products.
Thus, investors are usually welcomed. But there’s something that happens when this occurs: dilution.
Consider a simple scenario where a company founder owns 100% of their small startup company. An investor wishes to buy in on the action and offers to buy, say, 10% of the company for US$1M. Now the founder owns only 90% of the company, but there is a proven valuation of US$10M because someone bought 10% for US$1M.
Now the company has US$1M to play with, and they can spend it expanding as much as possible. But that’s really not enough to do the job, and more investment is required.
Enter a second investor — sometimes encouraged by the first investor. This time, “investment round 2”, the second investor buys 10%, but now they must pay US$5M. That’s more than the first investor paid, but the company is bigger now, right? If 10% of the company is worth US$5M, the entire company is now valued at US$50M.
And so it goes, round after round. Why is this happening? It’s because the investors actually don’t want to stay involved. Many seek an “exit” to cash out their profits, and often this is done on subsequent rounds. In other words, the “cheap” initial investments are sold later on to those paying more.
As the company’s valuation grows, so does its prominence in the market. Each round supplies tons of cash with which the company can increase its marketing presence. Everyone knows about them. Have their products changed? Not necessarily, because at this point it’s simply a game of growing the valuation and cashing out before it all collapses.
As investment rounds continue, the original founder’s portion continues to shrink. Eventually it’s less than 50%, and at that point the fate of the company is entirely in the hands of the investors — who are generally interested in short-term gains. They are not necessarily interested in seeing long-term success for the company or its customers.
At some point the company may enter the stock market, which allows the investors to more freely sell their holdings and cash out. Sometimes there are massive sums of money involved at this stage.
Inevitably, things go wrong because the company’s valuation has been pumped up simply to allow investors to cash out along the way. The true value of the company’s products and services may not match the valuation — and investors eventually figure this out. That’s when the valuations decline, sometimes to zero.
This is a story that has been repeated multiple times in the 3D print space, as well as other technology areas. It’s something that founders find themselves caught in, and unable to escape.
The moral of the story here is that investment may be tempting, but unless the founder is also in the short-term gain business, investment should be very carefully considered.
