Becoming the First Listed Company in Your Category: A Resource Lever with a Limited Window

#UseCapitalMarketsToWidenTheGap If you cannot use capital markets effectively to become the first listed company in your category, you may eventually become a consolidation target. The essence of going public is to discount a company's expected future profits all at once into its present market capitalization. By issuing shares, a company first obtains funds that would otherwise take years of operations to accumulate. In addition, a public share price improves asset liquidity. The company can use its own equity as “currency” to buy other assets, or raise further financing through rights issues, additional share offerings, and other capital-market transactions. In short, going public greatly increases the resources a company can mobilize and control. The industry leader wants a listing to extend its lead; the runner-up wants one to leapfrog the leader. Competing to be the “first listed stock” is therefore nothing new. ---- #FocusMedia Focus Media was not born the leader in building-based advertising. It was not the only company putting screens beside elevators to sell advertising; Target Media did so too. Starting in 2003, Focus and Target expanded their networks from Shanghai and Beijing respectively. Focus held on to its Shanghai base while eyeing Beijing; Target lingered in Beijing while coveting the Shanghai market. After several rounds of financing and development, the two companies presented their results in 2005. Early that year, Focus commissioned CTR Market Research to survey the market. Across 13 Chinese cities, the buildings covered by Focus Media and Target Media were split 70 to 30. On October 31 that year, Target released findings from a survey it had commissioned from AC Nielsen: across 12 major Chinese cities, its building coverage share was only three percentage points below Focus Media's. Different definitions and sampling methods yielded different conclusions. But that was not what mattered. Listing first and then acquiring a rival with equity delivered the overwhelming advantage. In July 2005, Focus Media became the first to list in the US, raising US$172 million at a market capitalization of US$680 million. Just six months later, in January 2006, it announced the acquisition of Target Media for US$94 million in cash and US$231 million in newly issued shares, successfully turning a rival into an ally. ---- #UseCapitalMarketsEffectively #GetTheTimingRight The next two contenders for “first listed stock” illustrate timing: there is a window for going public. Tudou was due to list in the US in November 2010, but a property dispute between founder Wang Wei and his former wife led to a freeze on his shares, delaying the listing. In December, Youku successfully listed on the New York Stock Exchange. Its shares rose 160% on the first day, taking its market capitalization to US$3 billion. In May 2011, Youku successfully raised another 590 million yuan through an additional share offering. In June 2010, short seller Muddy Waters made its debut by shorting Orient Paper. The company's stock plunged 50% that week, making Muddy Waters famous overnight. Over the next year, Muddy Waters targeted other US-listed Chinese companies, including RINO International, China MediaExpress, and Duoyuan Global Water, repeatedly scoring successes. As financial opacity fueled a crisis of confidence, US-listed Chinese companies increasingly faced questions from the media, short sellers, regulators, investors, and others. Tudou, despite filing its prospectus first, arrived late. It did not list until August 2011, at a market capitalization of only US$700 million—less than a quarter of Youku's—and was eventually acquired by Youku. Measured by revenue and market share, the gap between Tudou and Youku in 2011 was under 50%, nowhere near the valuation gap. The critical difference was that Tudou missed the best window for its listing. ---- With so many cautionary examples, startups were all racing to become the “first listed stock.” When Nayuki filed its IPO application with the Hong Kong Stock Exchange on Lunar New Year's Eve, reports also emerged that Mixue Bingcheng's “listing preparations have reached their final stage; the filing countdown is underway, and the listing process is expected to be completed within the year [2021].” No sooner had Xiaodian Technology announced a listing-advisory agreement with Zheshang Securities and preparations for an A-share listing than Energy Monster submitted its prospectus to the US Securities and Exchange Commission and listed on Nasdaq. The fresh-grocery platforms Missfresh and Dingdong both filed prospectuses in late June and listed less than a week apart. --- I often say: “In the internet world, people remember only number one. There is only monopoly, no oligopoly, much less perfect competition. Make sure you use the power of capital to secure first place. Otherwise, the good outcome is being acquired cheaply; more often, you are simply eliminated, with nothing left.”