The three-body theory
Sometimes the incentives of three unconnected entities are aligned
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The three-body theory
Sometimes the corporate world aligns the incentives of three otherwise unconnected entities.
Imagine the first entity as a late-stage startup that needs cash but doesn’t want to raise money at a down round. The second entity is a government that needs a very big and public technology-sector win. The third entity is really a hanger-on; a stock exchange that needs an Initial Public Offering (IPO) to prove its startup board has not been a complete failure.
The startup’s problem is that its old and rich valuation was possible when it still had a stronger story. But no matter what story it tells, it’ll need new buyers of that story sooner or later. The new buyers will poke and prod the numbers until it’s a third of what it once was. It could also list abroad and discover that public-market investors are less sentimental than private backers. A sale is almost out of the question because of said rich valuation.
So the startup needs money, but not just any money. It needs money that takes its word at it, without all the aforementioned poking and prodding.
The government has a different problem: it cannot take pictures of reforms. A factory opening, or a bell-ringing ceremony with a founder and a stock exchange official, can deliver hard evidence of efforts.
With technology advertised as the future of many emerging economies for fifteen years, a listing of a recognisable name on the local exchange, even in a dual listing, is premium photo-op material. The president will shake the founder’s hand, the exchange gets its listing, and the startup gets its money. Incentives are perfectly aligned.
The trouble is that IPOs are complex. The companies large enough to matter have spent the last decade structuring themselves to be incorporated abroad, dollar-denominated, and bound for foreign exchanges. The government cannot summon a listable champion out of thin air; it can only endorse one that already exists.
If the big win from this kind of endorsement is public approval, then you need to sequence this properly. Maybe a meeting at the presidential office, a trip abroad, and something with ministers.
Yet, each of these has to be a step the company wants to take, because this has to be a company large enough to make the endorsement worth giving, yet in a position to welcome friendly capital, and flexible enough to accept the ceremony that comes with it. Remember, what the government wants out of this is a recognisable win.
The exchange, which is the smallest party in the room, has a rather straightforward need: a splashy IPO. While the exchange has no leverage, it has patience and a willingness to accept a dual listing. The alternative is no technology IPO.
Welcome to the entirely hypothetical Three-Body Theory (please do not take capital raising advice from a newsletter!).
The Three-Body Theory is a situation in which three parties with different problems need the same transaction to happen. The startup needs capital without a down round; the government needs a public technology-sector win, and the exchange needs one credible listing.
Most people think of that transaction as the IPO, but the transaction is the round before it. It is the money that gets the company from its current problem to the bell-ringing ceremony everyone believes is coming. In one sense, this is just a bridge round.
For the startup, the round reduces pressure because cash buys time, which is a better alternative to raising money at unfavorable terms. If it can raise enough money before the IPO, it does not have to rush into a listing window that may be unkind or accept a private round that tells everyone the last valuation was a little too generous.
Also, the useful thing about strategic money is that it does not have to be all the money. It only has to arrive first.
Once the cheque is in, other money has a reason to gather. Nobody has to say they are joining a round designed to postpone a harder conversation about valuation. That is the elegance of the bridge.
The startup says strategic capital; the government says innovation, while the exchange says market deepening. Existing investors will say continued support.
The problem is that the three bodies do not share a calendar. The startup wants process, controlled disclosure, careful language, and investor alignment. No serious company wants its funding announcement treated like a ribbon-cutting. But the government wants credit and wants it now, so there’s bound to be friction there.
The existing investors, in this theory, are watching with the patience of people who know the best outcome needs compromise. You can hold on to your ideals, but forcing a company into a bad IPO is not a good outcome.
A bridge round may dilute investors, but that’s hardly fatal.
If the round keeps an IPO alive, buys time, and allows everyone believing the old valuation is still within reach, dilution is an acceptable tradeoff.
Nobody gets everything, but everybody gets enough to keep them happy.