21 September 2012

The IPO Quandry

While only a few have the luxury to debate whether it should file an IPO,  it is a decision that should not be taken lightly.  The monetary benefits come with numerous downsides such as constant analyst scrutiny, restrictive disclosure and governance, and an overall focus on short-term financial results.  Facebook, which had no need for the cash or extra distractions, is a recent example of a company that is probably second guessing its decision.  If there are so many drawbacks, why are all the IPO-worthy candidates going forward with it?   Do these companies have other options besides a public equity offering ?

Firstly, thanks to the recent JOBS act, Facebook did not have to go public.  It chose this route for probably the same reasons that other similarly situated companies do.  Top talent (from Sandberg on down) were poached from other Valley successes with the promise of liquidity and Menlo Park real estate.  The VC investors were silently pushing to  pad their fund returns.  Perhaps a little envy from the competition either going out or ballooning in market value weighed in.  Let's face it, a $100B stock offering is hard to pass up in many ways. But as Fortune's Dan Primack eloquently put it, going public made Facebook "uncool."

Many of the most successful companies in the world have paved their own way while staying out of the public limelight. Of the top privately held companies (excluding state run and PE gone private deals), many, such as Ikea and Koch, are still owned and operated by the founding family.  They have been able to maintain their culture, quality, and ultimate corporate mission while realizing growth comparable (or better) to publicly traded peers.  Some, such as Cargill, have even tapped public debt markets while keeping their equity off limits.  The $23B Wrigley acquisition by Mars shows private companies' wherwithal to execute blockbuster deals (many public deals are cash/debt anyway).  While difficult to keep stakeholder interests aligned as private companies experience rapid growth, many have shown success in doing so.

Some new trends may help companies stay private.  Crowdfunding's torrid growth on the early stage end  may help avoid VC-mandated exits.  For later stage companies, private exchanges such as SecondMarket are becoming widely used  platforms for individual stock transactions (in fact FB was valued more privately than it is today).  I wonder if IPO-tepid companies like Google would have delayed or cancelled IPOs if these markets were well established at that time.   Private equity is still a traditional option but still requires to play by the five year exit time horizon rules.  Debt instruments work for larger growth companies, but smaller ones either can't get it or require risky personal guarantees.  And even if going public ended up being a mistake, the excess money on the sidelines creates opportunities for founders to buy back their company  as Best Buy's Dick Schultze is currently attempting to do.

The IPO is a logical exit for many companies who are looking for cash or easily tradeable currency.   Trulia's first day pop today shows that the end of the IPO is not happening anytime soon.  Perhaps those that chose to take the long view for their companies will be less inclined  feel less to do so thanks to recent debacles like FB or expensive Sarbanes-Oxley requirements.  Maybe the democratization of information and the availability of alternate market vehicles will bring required investor returns low enough to avoid the pressure of going public.  Since the Silicon Valley techies hate the public markets so much, you would think their uber-creativity would have brought some innovative alternatives.   But then again, why would all the VC firms be on Sand Hill Road?

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