Key Lesson: At some point, going public becomes inevitable
(This is Chapter Two in My IPO Series. You can find Chapter One here.)
There are textbooks reasons for going public:
- Access to capital
- Liquidity for equity-paid employees, rewarding years of hard work
- Creation of a currency for acquisitions and attracting talent
- New credibility with customers and suppliers
You see this in MBA Corporate Finance 101 textbooks. And the same professor probably mentions the status of being public. That does not get bandied about as much anymore. That status has been diminished by a variety of factors (which I will get into for the next post), but there are still plenty of good reason to wade into the IPO process.
When I speak to private company executives nowadays, the chief appeal is really the ability to use stock as a way to attract talent. They probably want the acquisition currency too, but that is less common. Having public stock does make it easier for prospective employees to get comfortable coming on board.
However, the IPO as a capital-raising event is no longer as important as it once was. For the time being, the world is awash in venture capital funds. Any company that can go public can also raise a late-stage venture round. Still, once a company is public and filed, there is no question that its access to capital gets a lot simpler.
Beyond all these textbook examples, there are some other very good reasons to go public.
First, it is a fantastic marketing opportunity. IPOs are big, well-understood events that the media can write about easily, complete with shots of the management team on the floor of the stock exchange. Many companies have used the IPO as the cornerstone of broader mass market media campaigns which are especially useful to companies which need big audiences. Going public puts web sites into the mainstream eye. It is not a cure-all, but it is a pretty good growth hacking tool to have in a company’s belt. The same is true of companies that care less about consumers and more about enterprises, an IPO remains an important public milestone.
Another reason is that it can become a goal around which to organize and motivate teams. Now, the whole point of my series is that the IPO is just a step in the life of your company and should not overly distract from the long-term evolution of that business. Nonetheless, as a near-term event it can push teams to accomplish great things. So long as you do not let it distract from or distort the company’s strategic plans, reaching the IPO will become something that is celebrated internally.
A third, quieter reason is that it can be very good for management teams. It is an important item to have on a resume. Beyond that, being a public company CEO is probably one of the greatest jobs out there. You still have to deal with your board, but with time that board will become more manageable. This is shaky corporate governance ground, so no one really discusses it, but that does not diminish the underlying reality. Instead of having company equity concentrated in a small number of holders (often VCs), your equity is held broadly. As I will discuss in later chapters, managing that large body can be much more manageable than dealing with a venture-led board.
For many companies, going public may not be optimal, and the end goal is really a sale to someone larger. In these cases, the discipline of preparing to go public is still incredibly useful. Many companies file S-1s in preparation of going public only to sell out before the IPO. Having an IPO in the works is a tremendous bargaining chip. It gives the private company a credible alternative to a low-bid, allowing them to walk away if needed. And having the bankers in to give you an estimated IPO valuation gives a good benchmark when you go into any negotiation.
But setting aside everything else, there is one good reason above all others to take your company public – Your Board wants you to do it.
Eventually, they will get their way. This may not apply to your family-owned business, or those rare cases of largely bootstrapped, self-financed companies, but for everyone else that is the reality. A venture backed board has its own shareholders or Limited Partners. The VCs eventually need to pay back their own investors.Today, many venture investors argue that they can be more patient than public market investors. Maybe this is true in some regards, but eventually investment funds close.
Going public can provide many benefits to a company. But for most companies, there is really little choice in the end.
Coming up next: Chapter 3 – “Reasons for Not Going Public”