A common characteristic of companies from the 2007–2012 period is that many of them are focused on taking as long as reasonable to go public. While there are some drawbacks to being a public company, there are also a number of benefits.
Benefits of going public
1. Employee hiring, retention, and conversion. Compensation packages at companies sometimes go down after an IPO, with a higher conversion rate of candidates to employees. In general, this is due to the employees valuing stock as a liquid currency, as well as the perceptual de-risking of the company. Retention goes up on newer employees (who have more future value in the company) and often will go down for old-timer employees (who may have made millions or tens of millions and are now liquid and able to leave). In general, the old-timer contingent will be small and likely to leave eventually anyway.
2. M&A. A liquid currency provides the ability to buy companies without haggling around what the acquirers stock is really worth.
3. New capital sources for the company. Public markets can provide outsized funding for companies after an IPO. For example, Tesla’s ongoing rise may have been difficult to support without the broader based global capital flows of the public market. In a lose capital environment this seems like a minor point. In tight capital markets this can be the saving grace for a company. For example, Opsware went public in 2001 as private market sources had all dried up.
4. Ability to partner or sell at scale. A public company tends to be taken more seriously for partnerships, sales, and other business activities.
5. Fiscal & business discipline. When Facebook went public, monetization was viewed as a low priority for the company. After the first serious drop in stock price after an earnings call, Zuckerberg moved engineering and other resources into the ads team to scale monetization. An argument could be made that Facebook would never have reached a $500 billion as a private company. Public market pressure forced Facebook to re-examine its own priorities and led to a highly valued, liquid currency that could be used to acquire Instagram, WhatsApp, and other potential competitors.
Cons of going public
1. Larger, more complex board of directors. Once you are public there are a number of committees you need to staff at the board level. This increases board size and complexity. Small boards tend to be more nimble.
2. Financial and other controls. As you prepare for the IPO a number of financial and process controls need to be instated. Some of these are actually a net positive for the company, but many don’t help support the core business and just slow things down.
3. Employee mix shifts. As your company scales from 10 to 1,000 people, the risk profile of the people who join also changes. In general, the later stage the company the more risk averse the cohort of employees. Once a company goes public the hiring profile hits another transition. In general you will have the same overall caliber of people joining, however their risk profile will shift to more conservative. This can be actively managed or augmented by acquiring entrepreneurial companies and integrating them in culturally. Alternatively, the executive team and founders will need to encourage risk taking and rule questioning as part of the new culture.
Market cycles
Many first time founders running high-growth, private companies today have not lived through a major economic and capital cycle. When the public markets collapse private markets tend to overreact. This is due to a few reasons:
1. Comparables. If public market valuations drop by 20–30%, private market valuations tend to follow. This is the difference between a billion dollar valuation and a $700M valuation. If companies raised at a high price while the markets were strong, they may need to do a down round when markets rebalance.
2. Venture and growth fund LP rebalancing. Many of the limited partners (endowments, family offices, pension plans) in venture and growth funds have a set limit on the percent of their capital that can be in venture capital. If there is a large public market shift, they need to reallocate capital out of venture capital—which means that funds can raise less money to invest in startups. This usually takes one to three years to take place as the typical venture fund lifecycle is two to three years.
3. Fear replaces greed. When people get scared they sit on their wallets.
In general, it is best to go public during an ongoing bull market. You can raise large amounts of capital and have a liquid currency by which to make acquisitions. The capital you raise in an up market allows you to survive, and act more aggressively in a down market. Amazon took advantage of being a public company masterfully. During the bubble in the 1990s they used their market cap to make a large number of acquisitions. As the bubble collapsed they used the large amounts of capital raised from public markets to sustain the company through the dark periods of the early 2000s.
As founders wait longer to go public, they may end up with extra hurdles or obstacles relative to their IPO price. This may include drops in public markets, unusual private market terms (for example needing to clear an IRR or IPO price hurdle in order to raise private capital), or simply raising at too high a valuation and then spending a few years hopefully growing into it.
While the 1990s were characterized by companies who went public too early, the 2010s perhaps had many companies that waited too long.
IPO process
As you approach your IPO you should appoint an IPO team and a directly responsible individual (DRI) to project manage that team with the CFO overseeing the overall IPO. In parallel, you can reach out to other CEOs and CFOs who have taken their companies public to learn more about tips and tactics for a successful IPO.
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