Go Public or Go Home
With the economy on the mend, it’s time for more businesses to launch IPOs (initial public offerings). Pro or con?
Pro: IPO Is for the Visionary
To IPO or to sell, that is the question! For many companies, it is an easy question to answer if you look at the quality of the company and the opportunity presented by the market addressed. The most lasting technology companies are built by exceptionally talented people who have a clear vision for their customers and of their market. They pursue this vision zealously. If the market is big enough and the company is executing, then a public offering is a no-brainer.
For these companies, an IPO is not an end goal but a financing waypoint. The IPO provides cash and equity that accelerate the realization of their vision, and enables the company to continue growing in every aspect of its business from product and employee growth to broader geographies and, of course, increased earnings. A private sale is never the ultimate goal for these companies because such an outcome is optional, even tactical. Great companies will only take the private sale option if the sale will both accelerate and magnify the market impact of their ideas, not just to find an easy exit.
The IPO market is healthy again. Now is the time for great companies to IPO and take that next step in executing their visions.
Con: Not the Right Path for All
Many entrepreneurs still regard the IPO as the holy-grail exit strategy. I’ve managed two companies through an IPO, and like anything else it has pros and cons. In addition to shiny success stories, the public markets are littered with penny stocks and companies that should have considered alternative routes for liquidity. Historically, research shows that only about 50 percent of IPOs survive.
Beyond the cachet of an exchange listing, there is intense regulatory (Sarbanes-Oxley) scrutiny, public reporting, and a new level of governance. Insurance and risk protection can cost up to $5 million a year. With the minimum revenue to list hovering around $100 million, a company has to absorb increased costs while reaching or maintaining profitability—currently, only 70 percent of companies that IPO are even profitable before doing so. Companies must also deliver steep growth to justify the valuations paid on the IPO.
Once a company goes public, it will find that how and where management time is spent will change, too, as more than 20 percent of CEO and CFO time is diverted to investor and board relations. Consider the pressure to perform, meeting strong growth from the $100 million in revenues with costs up by 5 percent or more, while exceeding shareholder expectations. Operations shift to a short-term planning horizon focused on making quarterly targets, which can detract from strategic opportunity and innovation.
IPO glamour is portrayed by a handful of companies like Google (GOOG) and Salesforce.com (CRM). Yet there are other market examples like Skype and VMware, which operated privately, have achieved high valuation exits, and continue to develop and innovate without public market pressures.