The rise of Facebook has become the gold standard for entrepreneurs that are striving to take their groundbreaking ideas from dorm room, to Silicon Valley office, to an Initial Public Offering (IPO.).
On the heels of unprecedented hype, Facebook raised a colossal $16 billion in May 2012, which instantly made Mark Zuckerberg a multi-billionaire in the process, while pushing early investors like Peter Thiel into the Silicon Valley limelight.
However, following a series of stumbles, the pros and cons of the IPO market are now being carefully weighed more than ever before. Gone are the days of the end goal being an exit strategy. This leaves many left to wonder – should a lucrative IPO be the ultimate goal for all entrepreneurs?
The Recent IPO Quandary
IPOs are a mechanism for private firms to raise capital by offering shares to the public. Shares typically trade at a premium to what early investors initially poured into the firm, making the pivotal event a fruitful opportunity to cash out. This is the ultimate goal of many upstart tech entrepreneurs. A cursory glance at the sheer size of the biggest IPOs in history demonstrates why this is the case.
However, IPOs are presently in a somewhat precarious position.
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Case in point: WeWork. The cestors and entrepreneurs alike – IPOs may not be the opportunity they once were. And in the context of the tech industry, startups with burn rates to the likes of WeWork are the most susceptible to misplaced visions of grandeur.
Similar cases include Uber’s long-standing struggles to generate profits, which led to a steep decline in its stock prices following its IPO before the WeWork debacle.
The subpar performance of many recent, high-profile IPOs led to what some call a dead IPO market. However, the answer is likely slightly more nuanced. It appears that many companies, bolstered by VCs flush with cash, are going public when they either don’t need to, or flat out shouldn’t.
Many mid-level companies have taken this into consideration too. For example, an increasing number of companies are choosing to remain private, foregoing a potential opportunity to reward early investors, and there are two main reasons why. For starters, the underlying costs are high, and many companies simply can’t afford it while hinging their entire business’s success on whether an IPO triumphs. Also, there are some salient advantages to remaining private. These include ownership control that targets long-term goals, reduced exposure to liability, and decreased disclosure requirements.
An IPO is not the goal of a mom and pop shop or the vast majority of small businesses that make up 99% of companies in the U.S., though. And for businesses that fall in the brick-and-mortar category or mid-level manufacturing, it may not be in their best interest either.
Most small businesses are content with making enough profits to continue as small businesses to support their families and employees. Others just don’t want to answer to corporate boards and public investors, which comes with significant demands to increase stock prices and soothe shareholders.
Going public is risky and fraught with potential risks and liabilities that the company’s early founders and employees may be exposed to.
But to only discuss the recent problems of IPOs misses the point.
Suited For The IPO Market
When it comes to an IPO, it really boils down to size, preference, and timing. Most successful mid-sized IPOs today are revenue-conscious, lean businesses that can turn a profit through a viable product or general business savvy. On the other hand, the behemoths, like Alibaba and Visa, are the dream IPOs. Visa even raised close to $18 billion amidst the 2008 financial crisis.
However, there remains a class of companies for which IPOs are well-suited, and will continue to be. Generally not suffering from cash-burning tendencies, these firms (both large and mid-sized) are crafted explicitly to generate profits, and they are primarily financial services companies.
The perceived legitimacy that comes with an IPO grants easier securement of finances, business interactions with other publicly listed firms, and of course, lots of cash.
Since public firms have to publicly disclose aspects like earnings and balance sheets on a regular basis, insights into a firm’s revenue are transparent.
Other industries where IPOs are suitable and remain common also lay outside financial services, such as mining companies, commodities, and oil refinement. These industries are typically the ones where one would find the behemoths outside of the tech scene.
Ultimately, whether an entrepreneur should take their company public depends on circumstances that only they truly understand. Weighing the costs and benefits of taking a mid-sized company public is an arduous task, but if recent market struggles prove anything, IPOs are far from a golden ticket to glory.
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