Ever heard of the virtuous circle in equity financing? A new startup, let’s call it the Wright Motors Company, has big big dreams. They want to make personal electric flying vehicles (EFVs). Wright Motors believes that in the future EFVs will replace ground vehicles, an old technology. To accomplish these dreams Wright Motors needs a lot of capital. It will need billions of dollars.
To raise money Wright Motors decides to sell shares. EFVs chances of success are low and it’s a very risky investment. Wright Motors makes big promises and gets investors super excited. Wright Motors claims that EFVs will unclog our roads, free up crucial real estate taken by parking lots, revitalize the economy, create smart green jobs and provide us more with the commodity we need the most; time. No more dirty polluting clogged gridlocks! If you want a piece of the future, the opportunity is now. Once EFVs gets the attention of the mainstream media, the stocks will be expensive and it will be too late. In five to ten years, you want to look in the mirror and say “look at the wise decision I made. My capital has contributed to a better world and my family is better off.” You want a piece of the American dream don’t you? You don’t want to be left out. You will be the coolest person at barbecues. Electric flying cars beat talking about Treasuries.
Investors are excited and Wright Motors raises a lot of money through selling shares. Now the hard work begins. Wright Motors needs a product, engineers, scientists, smart workers, parts and equipment, and a massive factory. Once it has accomplished these things, it will need a sales team, marketing, accountants, lawyers, customer service, and a service team. And more money.
After all success is never a straight line. But there’s a lot of enthusiasm surrounding the company. The media is hooked on the story and Wall Street is always looking for the next flavor of the month. Wright Motors taps Wall Street and manages to raise billions. Banks pocket millions in fees. And rather than punish the company for diluting its shareholders, the market sends the stock higher. It’s a great story after all.
Finally, Wright Motors announces that they have a working EFV prototype. The stock surge on the announcement and Wright Motor issues more stocks. The money raised goes toward building the factory and production should start soon. The stock is up on the good news and more shares are issued.
For a company with no revenues for the foreseeable future the stock looks expensive. But valuation is based on the future cash flow, or future projections in the case of Wright Motors. So Wright Motors makes the story more compelling. The better the story the more excited the investors, the higher the stock price. You are investing in a piece of the future after all.
Wright Motors burns all its cash and needs more money. They follow the script which is the higher the stock price the more money I can raise. Wright Motors announces they will enter the China market. China! That’s a billion plus customers! Now the stock is in complete frenzy and Wall Street goes to work.
A silicon valley technology giant is interested in acquiring Wright Motors and makes an offer. Wright Motors rejects the offer on the basis that the price is too low and opportunistic. After all it doesn’t take into consideration the potential ride-hail service and a future robotaxi launch. The stock surge some more and more shares are issued to make the vision happen.
The latest offering boosted Wright Motors’ market capitalization to over $250 billion, ahead of traditional plane manufacturer Boeing. Wright Motors is now among the world’s most valuable manufacturers in the world. The ascent of Wright Motors’ stock helps shore up the balance sheet and fund endless aspirations. Everybody wants a piece of the action. Wright Motors is now teasing another new factory and governments from all over the world are competing for the prize. Some are offering to foot the bill in addition to massive tax breaks. Here comes the kicker: This new factory will manufacture a flying truck! It will revolutionize the way we work hard!
Wright Motors follows the script and lets the virtuous circle roll! As long as investors are believing in the vision, the capital market will be generous. Excitement drives the stock price up, a higher stock price raises more money, which drives production, which drives a higher stock price, which raises more money.