Last week I looked at all the reasons not to go public. And there are a lot of them. Being a public company comes with a lot of headaches. It is expensive and sucks up a huge amount of management time. Nonetheless, this is the path that many companies are pursuing, and always have. So there must be something to it.
Historically, the chief appeal of being public is the access to capital that having a publicly traded stock provides. For most of US financial history, there were really only two sources of funding for a company – bank loans and the public equity markets. That landscape has changed dramatically in the past thirty years. For any company that has any connection to “technology” there is now a deep array of options. Wealthy individuals have boosted the seed or ‘angel’ round of funding, and in many cases later stage financing as well. There is a deep reservoir of venture capital financing out there too (at least for now). There are also a number of banks and other institutions willing to make loans to venture-backed companies. There are many ‘strategic’ or corporate venture funds that will invest in private companies where they see a potential strategic fit. Finally, we are seeing many large mutual funds and hedge funds dip their toe into private companies that were once the sole domain of venture capital. So in theory, a private company can go for a long time without tapping into the public markets. Nonetheless, the amount of public funds out there is much bigger than any of the other sources. If you have big expansion plans, being public can help you tap into a very large pool of financing.
A second, very important reason is that helps to attract and pay talent. As innovative and disruptive as your engineering ambitions may be, your employees will eventually want a ‘liquidity event’. Private companies can go a long way by paying their employees largely in stock, but someday that stock has to be tradeable. So far, no banks accept options for mortgage payments. And if their are any private schools that let parents pay for tuition in options, please let us know about them. Of course, this cuts both ways. You want your employees’ interests to be aligned with your own and that of other shareholders, but once those employees can sell their stock they very likely will. The Valley is littered with one-time high flyers who lost their mojo and momentum after going public and seeing all the key employees cash in their riches and move onto new ventures or early retirement. Realistically, the need to compensate your employees will eventually become one of the biggest pressures on you to take the company public.
Being public also means that you now have a ‘currency’ to attract new talent and to acquire other companies. This may not seem important when you have ten employees working in your VC’s converted pantry, but eventually it will become very important. I think this is particularly true in today’s tech landscape. Of course, you do not need to use public equity to acquire someone else, but having a publicly traded stock makes any such acquisition much easier.
There is also a nice status element to being public. It is one thing to be featured in a flattering Techcrunch profile, but is quite something else to see yourself pixelated in a black and white sketch on the cover of the Wall Street Journal. Even if you cringe at the idea of being a public figure, it is hard to argue with the marketing benefits of being a darling of the mainstream press.
But what it comes to in the end is that you do not actually have a choice. The biggest reason to go public is that your Board wants it. They will eventually bring enough pressure to get their way. Unless you have grown to scale without raising any venture money (and that is very rare), the Board has a say. I am not trying to disparage venture investors, and many of them want to be very patient, giving you time to grow. But they have their ow investors to contend with, investors who expect an eventual return on their capital. This may sound cynical, but it is reality. It does not need to be a bad thing, but from the moment you take venture money you need to be aware that they will someday seek an exit. Maybe that exit will be a sale, maybe it will be an IPO. Either way, you need to understand what being public means. Next time, we will look more at that choice between selling the company to a larger player and selling a stake to the public markets.
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