Big or Small IPO, Being Public Isn’t All Great

A piece on pandodaily covers a movement in Silicon Valley to bring back the smaller IPO’s. The current trend for exits for growing companies is the “flip”, where basically they get bought by someone larger for reasonably large amounts of money, or the blockbuster IPO worth billions. One of the proponents of bringing back “smaller” IPO’s rather than flipping is Andy Rachleff, one of the founders at Wealthfront. Their goal is for these companies to remain independent, and to continue to grow on their own, rather than being “acqihired” by someone larger (Google being one of the biggest buyers for web technologies, and IBM for enterprise bits). I can understand there are certainly concerns for this trend of bigger fish gobbling up a lot (and I mean a lot) of smaller fish.

Concentration of Power and Sequestering of Innovation

I could see there being a concern that the concentration of this technology inside larger firms, because it could lead to a couple of problems. The first is that it can lead to a monopoly in some particular area, and everyone is familiar with the promise and peril of a monopoly. The good can be a degree of stability and predictability, particularly if you build products aimed into that monopoly. Having a large, stable and known base of potential customers can help make a product commercially successful. The peril, though, is that the monopoly causes innovation to be suppressed or shutdown, because there is no effective way to compete with the bigger guy.

A different problem, though, could be the potential for innovation to be “sequestered”. This can happen when a company is bought for their technology, and their team, but the technology is basically left to languish, either misused, under-used or not used at all. The technology, and the potential for what it could do, is effectively taken out of commission. The team itself are always free to leave and try again, but given enough economic incentive (the dreaded Golden Handcuffs), that can also remove talent from the pool.

Ultimately, it can result in an environment where a company has every incentive to be “big enough” to get their exit from Google, bide their time until whatever conditions of the deal are fulfilled, and then can emerge to try something else. But in the mean time, you have talented people off the streets and unavailable to try to move things forward (and build and grow companies to create new jobs). The alternative is to have to “go big” so that you can justify the monster IPO, and the pain and headache that go with it.

So, Why Not Go Public?

While it may seem, on paper, that going public with a small-cap or mid-cap company would be attractive, it has downsides. Yes, there are economic incentives, in the form of public traded stock that is now liquid. But there is a price: more oversight, more paperwork and ceremony, and a little less room to move.

Being public means you have to deal with the regulators. That means you need staff, contractors or a service firm to help with quarterly and annual filings, filing releases of material information (so every press release or other announcement has to be filed with various agencies). You need investor relations people to answer questions and deal with the release of material information. This means people, time and dollars not spent on delighting customers. It means that information you’d normally want private (your financials) are now available for all to see. It can mean having to focus more on the next quarter or two, and keeping analysts happy, to minimize the bad press you get if you don’t hit the numbers people expect.

So going public can be good (money to grow the business, shares your employees can turn into cash), but it isn’t all upside. Being public has a cost, and it imposes limits. That can make a modest IPO less attractive. Better to sell out to someone bigger, than deal with the months of effort to put the IPO together, and then deal with the change in culture once you are public. If you’re going to change the culture, why not get a big payout now?

Will Things Change?

As with anything in this world, things will change. They will change because enough people will decide that the overhead and effort associated with being a public company is worth it, even if the IPO is only for a few tens of millions of dollars, and the founder’s real payout is still years down the road. Conditions will change when enough people feel it is more important to grow their company and try to make something of it on their own, rather than go for a shorter-term payoff. For now, though, the path is clear: you either “go big” and be the next Facebook or Salesforce, or you get get “big enough” to get Google or IBM or someone else to buy you out.

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