I feel that I have to drag out this post a little bit. One of the key messages I want to convey in this series is that as private companies become public ones, they undergo a dramatic transition in their shareholder base. Put simply, companies trade their venture backers for public, Institutional Investors.
These are two, very different groups with very different outlooks. Management teams need to keep in mind that managing the expectations of these two groups requires two very different frameworks.
When it comes to the topic of going public and an IPO, things get even more confusing. In many ways, the typical time horizons of these two groups get inverted. Venture investors, who typically have a very long-term time horizon covering many years, become much more short-term focused. They want the IPO, and many will see it as the end of their journey with the company. It is human nature to get less impatient the closer we come to the end of a trip. And VCs are no different. As patient and worldly as they can be, they have many incentives for wanting the IPO to come soon. By contrast, public market investors are getting ready to start a long-term journey. They may only hold company stock for a quick flip during the IPO, but a well-run company will draw their interest back, again and again. The goal of investor outreach during the IPO is to lay the foundation for long-term investor interest. Company’s behavior during the IPO will go a long way in determining how the Street treats that company.
It should be clear, that during the IPO, these two investor groups have very different objectives. There is no judgment in that statement. I am not saying that VCs are bad or greedy, nor am I saying that public market investors are easy, fun-loving folks. But the reality is that the two groups want very different things.
Management teams need to recognize this and balance the needs of both groups accordingly.
This is part of Chapter 4 in my series “A Practical Guide to IPOs” – you can find the beginning of Chapter 4 here and the start of the series here.