To float or not to float? Snapchat and Blue Apron may have underperformed for shareholders, but taking your tech startup public is still a good bet.
Stay private or go public? Opinion remains divided on whether or not tech entrepreneurs should dip their toes in the initial public offering (IPO) market.
An IPO, otherwise known as a stock market launch, offers shares in a company to public investors.
As a result, it is one of the best ways of turning entrepreneurs’ and their employees’ equity into hard cash. Furthermore, it raises capital, allowing the firm to expand.
Snapchat and Blue Apron
However, the hype around tech firms can mean their stock price sometimes becomes inflated and investors can pay over the odds.
IPO sceptics point to image messaging app Snapchat and meal kit delivery business Blue Apron. Both businesses went public this year and as of September were trading well below their initial offering price.
“By going public, companies chain themselves to quarterly performance goals, which makes it extremely difficult to execute the kind of long-term strategy that creates a truly great company,” Peter McKay, co-CEO of privately held software company Veeam, told Fortune.
“Investors may tolerate lower profits, and even losses, so long as growth remains robust, but patience is not their strong suit.”
In other words, companies whose investments take a long time to pay off will be punished by a falling stock price. McKay points out that this leaves them vulnerable to acquisition or a hostile takeover.
In addition, it negatively impacts employee morale, whose pension plans are stock options depend on their shares gaining value.
“Second, as a public company, executives have much less room to manoeuvre,” McKay continues. “Not only is the company expected to meet or exceed analysts’ quarterly performance expectations, but disclosure requirements mean that the leadership team must telegraph, if not outright state, its strategy.
“This makes it difficult to quickly change direction to take advantage of a market opportunity.”
“And the final indignity? For this loss of control, the company will pay millions simply to keep up with paperwork and reporting,” he adds. McKay’s advice? If you don’t have to go public, then don’t.
Capital gains and transparency
However, there are signs that the tech IPO market is rebounding. As of September, 15 tech firms had gone public in 2017 – and unlike Snapchat and Blue Apron, are trading above their IPO price.
US data centre operator Switch recently raising $531.3 million via an IPO.
“As a public company CEO who endured the choppy waters of the 2016 IPO market, I understand business leaders’ hesitation about joining the stock market,” Rob Bernshteyn, CEO of software firm Coupa, tells Fortune. “But I contend that the benefits of being public far outweigh the luxury of staying private.”
Bernshteyn argues that having the power of the capital market behind you can help a business. Plus, the transparency that comes with shareholder ownership can actually be of benefit.
“Being public forces us to open up our financials for everyone to see − prospective customers, shareholders, employees, partners, and yes, even competitors,” he says. “Transparency is a good thing. Embracing this transparency and authenticity, rather than feeling fiscally constrained, yields an extraordinary level of openness and trust with prospective customers.”
Taking your tech startup public
Bernshteyn also points out that private companies come under scrutiny when mistakes are made, just like their private counterparts.
“It’s not as if being private totally shields you from attention,” he says. “We’ve seen a lot of high-visibility private companies such as Uber garner a great deal of public scrutiny. It comes with the territory.
“To be sure, going public brings a new level of responsibility and stakes to your business. But if you’re ready to push your company to achieve its full potential, an IPO might be your best option.”
If you enjoyed this article, read more here: