IPO Loses Its Luster For Some These Days
from the high-class-problem-to-have dept
Are IPOs becoming less attractive? In the post-bubble economy with higher costs, more government scrutiny and all the work that goes into an IPO, some are questioning if the IPO still should be the liquidity event of choice for entrepreneurs. The story uses the example of one dot com CEO realizing the process was too stressful and distracting from the work at hand, and decided to sell out instead. The story contains a litany of experts who attest to the fact that it is growing more expensive and more challenging to run a public company, but struggles to find more solid examples of companies that could have done an IPO but opted for a sale instead. The perception is still that the IPO is the way to go. In part, this is because VCs, the press, and plenty of others still seem to promote the IPO as the only viable “exit strategy” (not necessarily ever asking why an “exit strategy” is needed), and partly because, indeed, you are much more likely to make gobs and gobs of money that way. So, it’s going to have to get a lot more expensive and troublesome to become and run a public company for them to sell out when they can IPO instead.
Comments on “IPO Loses Its Luster For Some These Days”
Pooositive thinking
But we have to think positive thoughts, that we don’t need to work anymore after the IPO. Who would want to toil earnestly for the rest of their working lives, to make the world a better place or something?
let's pretend
Let’s pretend you own a company with an innovative and reputable idea.
Why would you go public?
Either you are an incompetent business person, unable to use hard work to leverage that idea, or you are a liar who is trying to fleece the public.
If your idea has merit, there is no reason to go public. Unless you’re an idiot or ready to retire.
Re: let's pretend
That’s not necessarily true. The real reason a company *should* go public is to raise capital for something they need to do. It shouldn’t be “an exit strategy” (why should anyone want to buy into a company exiting?). But, yes, I do agree that many companies go public to cash out — which is the exact wrong reason to do it.
A company that can build themselves up privately, and simply generate cash, is a great business.
Re: Re: let's pretend
What’s interesting is this dichotomy — Americans pride themselves on being a charitable people, of feeding the starving babies in Africa. Their attitudes towards business is that it should maximize profits by any immoral means necessary, that it should employ as few people as possible and price-gouge as much as possible. We don’t see a lot of blending of the two, that a business should serve a necessary social function for the good of society.
Re: Re: let's pretend
So, Mike, by your logic, you should never buy shares in a public company, even on an exchange? Because that’s some other investor ‘exiting’ and who would want to buy into a company under that circumstance? Or maybe that’s just the market working – they want the money more than the shares at that point in time.
As another poster pointed out, that’s what the ‘exit’ for the early investors is all about. It’s not that we don’t believe in the company, but our investors want their money and profits back at some point, that’s their deal with us VCs. Don’t want to deal with this? Don’t take venture money. Don’t like the odds on IPOs? Don’t buy them.
Re: Re: Re: let's pretend
Hi Tim,
I think you read too much into what I said and made assumptions that simply aren’t true. Obviously, investors want their money back at some point. However, the point of going public should never be as an “exit strategy” for the investors, but what’s best for the company itself.
I believe there are plenty of companies that do go public for the right reasons, but too many don’t, and are pushed to go before they are ready, just because the VCs want their money back, and the company suffers for it. You don’t believe that?
I never said that no company should go public. Nor did I ever suggest that no one should sell their holdings in a company (or buy into one). I was merely pointing out the *reasons* why many companies do end up going public as compared to the reasons why they should.
Re: Re: Re:2 let's pretend
There are certainly cases where IPOs are unjustifiable. In fact I’ve written about things like reverse mergers that are artificial constructs to create exits. But I wouldn’t be so absolute about an IPO ‘never’ being driven by exit strategy. Investors are part of the stakeholders in a company. Should their interests ‘never’ be considered? How about the common holders who would like to finally be rewarded for their efforts?
Other than structural issue of closed end VC funds that have to be wound up at some point, there’s also somewhat of a philosophical or economic issue here: How long should a company and its investors go before their judgment of value should be confirmed in an open market. For every case of premature IPO, I’m sure I can find one where the nominal valuation of a private company is way out of whack, often leading to too much capital being poured into what turns out to be a losing proposition. This is a net social and economic loss. At some point, the judgment of the market – both customers and public investors – has to be brought to bear.
Re: Re: Re:3 let's pretend
Sure, investors are one set of stakeholders, but the damage done by investors pushing a company to go public too early can be catastrophic for the other stakeholders. Going public is a big deal, causing quite a bit of upheaval for the company — if the only reason to do it is to cash out, that’s worrisome. Who wants to invest in a business as its original investors just want to cash out?
If a company is making decisions for the right business reasons, to build a stronger, more sustainable business, there will be plenty of opportunities for investors to get their returns. However, I stand by my statement: no company should go public simply for an “exit strategy,” but because of business reasons to support the company itself.
This isn’t about “justifying” an investment, but about building companies. If justifying the investment harms the company, why should the company go along with it?
There are plenty of legitimate reasons to go public. Letting your VCs cash out is not one. I’m not saying that the VCs shouldn’t cash out — just that if that’s the driving force for the IPO, the company is in trouble.
Correction some misconceptions.
It’s true that there are many great businesses that can grow (or should have grown) organically. In one case, two partners and I built a business that eventually was worth over $2Bn by funding it with $2,000 each. But it grew slowly and (by definition) didn’t have a large capital requirement (plus we gave it lots of freebies in the early days, like free rent, free computers, etc). Plenty of good businesses like Amazon, or Google or GM needed more capital to just get going. Hell, a restaurant needs more money than that to get going.
So if you ask someone to put money in, they will ask for some way to get their money out. Some people will be satisfied by interest payments (e.g. a bank, perhaps your parents). Other investors (e.g. VCs) want the opportunity for a large single liquidity opportunity (basically a sale either to another business or into the public markets). If you aren’t planning to have such an event, then you get your money elsewhere.
In my experience, VCs are just as interested in a sale as in an IPO. In fact in many cases, they can get better liquidity for their LPs (who are their customers, don’t forget) from a sale to a very large buyer than from an IPO.
However if you structure your business expecting a sale than you will most likely create an inferior business (because you’ll skimp on certain elements that “won’t be needed”; you’ll be screwed if the market moves against you, and you reduce your flexibility), so planning for an IPO means you’ll build a stronger business, even if you do end up selling. And it also forces you to keep thinking of ways to grow the business, so you’ll have a reason for public-market investors to buy your equity — another way to build a stronger tech business.
By the way it may be rational to buy public stock from a company that won’t be investing it — it’s a way to receive part of their profit stream (dividends). That doesn’t float my boat, but outside the tech business it’s perfectly rational.