A Rising Number of Startups Reckon They'll Never Go Public
bloomberg.com
bloomberg.com
Everything eventually goes to shit once a company goes public.
In the beginning, it was about some kickass product/service. The focus is on making something good, offering a good service.
Once a company goes public, the all-consuming reason for existence changes. Now it's no longer about the good product/service. It's only about increasing value for shareholders.
This begets mergers and acquisitions, which begets mass layoffs. (Where CEO gets more fat pockets than he had already, shareholders get a little more than a pittance, and hundreds if not thousands of employees get the shaft.)
Why not bootstrap, and get money the old-fashioned way, by working your ass off? You know, building something YOU control, and that you're not beholden to shareholders for?
Build something to last instead of looking for an exit?
I left my last job of 8.5 years, the longest I've ever been at any one job, to go out on my own. Sure, it's a risk.
My employer was in the process of an acquisition, and it completed after I left. Then articles said they were planning on laying off 10% of staff. It's hit 20% now, and no end in sight.
VCs need a liquidity event to happen within the expiration of the fund that they wrote the check from. IPOs are theoretically unbounded in terms of availability.
For access to capital. If you were an Uber/Lyft competitor, it becomes very hard to compete with competitors who have near vast amounts of money to spend on marketing and customer/driver acquisition. Both Sidecar and Hailocab (in the US) lived this first hand.
Some (if not most) businesses cannot be bootstrapped. It took a while for Google to become profitable, and who knows if the search product would have been as good if they had to focus on generating revenue on day 1.
It just makes me sick.
And when they find out you're minting money they'll jump in and undercut you on price, poach your talent, replicate your product (but not all the costs you put into development), and then do everything to out-compete you. And then your profits start to corrode. And eventually you're either forced to sale or forced into ever more narrow niches.
Public companies have a cheaper cost of capital, which means they can, over time, outcompete non-public companies.
There's a few exceptions to this like private-equity backed companies, and large closely-held private super firms like Koch, Cargill, etc. But if anything these firms are even more ruthlessly capitalistic than public companies.
There's no way around this unless you occupy a very well-protected space that big companies wouldn't find profitable.
I think it's becoming increasingly more difficult to find such spaces in software.
At the highest levels, this is considered monopolism, and measures are put in place to avoid it... but at its lower levels, this is just "everything working as expected" in the engine of capitalism.
You ask 126 people at SXSW and then make that story out of it? I think that's a little bit to much.
Silicon Valley may be good at multiples, but not so good at profitability.
Acquisitions by private companies aren't as common as public companies, and the valuations aren't typically as high. So if everyone stays private, there aren't as many opportunities for 10x+ exits. Which means there's less cash to invest in high risk startups. VC's depend on the big winners to cover the countless losers.
If startups bootstrap, then they need to make money early. Which means you can't hire until you make money, but you can't make money unless you hire. So ambitions are seriously limited in the first couple of years. As are salaries. Not easy to attract great developers when you can't afford to pay them.
On the flip side, bootstrapping a company and focusing on building products that people not only love but are willing to pay for is insanely satisfying. There's also a lot of upside to working with a small team for many years before scaling.
In addition, the exit must occur within the maturity term of the VC's fund.
I read somewhere that Aaron Levie of Box.net only owns about 4% of his company. Choice runs out when money does.
Put another way what does the investor gain putting money in a company that stays private?
Pretty common for companies that never raised VC but did raise outside funding (and thus doesn't have a fund liquidation deadline).
A family friend's parents have held a significant stake in a privately held company, where they've been paid a dividend for 20+ years.
Considering these people are supposed to have all the same experience level, I'm surprised why there's such variation.
Also, they described 5+ years experience, not the same experience level.
The question was, as I interpreted it, what could early hirees be offered, besides share options, to entice them to join a company?
My answer was along the lines of what would entice me.
I've played the share option game, and did reasonably well at the time, but my last two years at the company was just "resting and vesting." I have no attraction to that again.
So, what would be required to attract me to US startup with no goal of going public? A decent salary, 4-5 weeks annual leave, sick leave and parental leave. This would really just put me on a par with my current European employment situation, but it is the minimum I would require in this scenario.
I'm not arguing here that USA rules EU sucks cuz $$$. I get that Europeans get more social benefits and free time. I was just responding to phillc73, who was arguing for more of the Euro perks, that those perks are not cheap.
Just looking at salary is comparing apples to oranges.
On top of that, you get paid double or triple. If your sick, you just say, 'i'm sick' and either WFH if it's minor and you don't want to infect the office. Or not work at all if it's major enough
I imagine it's the same in the US outside of SV and NYC.
Jobs in the US pays the most, but not by a very large margin. Even less if measured in buying power. People in the US also prioritizes salary higher than people in western Europe, say.
You can say "well they shouldn't hire people they cant afford" but that's not very realistic. When you start a company in your garage everyone is making sacrifices b/c they think they'll cash out later.
(obviously the terms need to be actually equitable rather that being designed to screw over the employee)
Second follow up why would I join a company that will never go public, after the founders took money off the table?
Clipping dividend coupons like a retiree? If I wanted to do that I'd invest in dividend paying public companies and bonds.
I'm all ears, tell my why any sane LP would want to invest in VC right now.
Much of the so-called returns VC's have experienced have been paper returns due to ever higher valuations placed on portfolio companies.
But then when those companies get widespread scrutiny (which all going public really is) then you're luck to not lose more than 10%.
So I'm paying VC asset management and performance fees for the privilege of losing money?
I'm unclear how this is sustainable.
I think this bubble has gone on for longer than the last one in part because there are fewer public companies and less hard-nosed scrutiny of these companies.
I get that this is what the secondary markets would like after all a stock market without pesky regulations is so much easier to make profits on if you control the market, than one where you have things like "rule FD" and that whole insider thing which everyone hates right?
Here is my prediction, the secondary market stuff will grow for the next 5 years. Once really significant sums are passing through it there will be a big scandal that wouldn't have happened in a more regulated market and the government will swoop in and regulate it in a similar way eliminating much, if any advantage.
As far as i can see, the invented heave-ho of a demonstrably unprofitable business into IPO is troubling. These businesses are not designed for profit, but for [unsustainably costly] growth. Sure the IPO may earn the founders millions, but is it worth the stress that comes along with it? Invariably investors want to make money. Often times the IPO play feels like they are earning their money by throwing the founders to the hungry masses.
How many companies have we seen repeat this pattern and suffer massive morale hits? The (my company failed/i was asked to step down/i wish i still controlled my company) blog posts paint a telling tale of what looks to me like a failed experiment.
I've never exited for millions so maybe there is a sense of accomplishment i am missing here, but count me out. I can't imagine an amount of money that would justify feeling like what was once my weekend project has grown to something beyond my control. That it has left me embattled with investors and then a public funding round i feel like i can never satisfy.
I don't get the sense the zombie unicorns are fulfilling dreams. Instead, i get the impression they are keeping people up at night.
Wasting other people's money until the end of time is not a sound business model. If they are not designed for profit the design has to change at some point in time, even if it this means morale hits and keeping people up at night.
And even if a company folds after (say) 30 years, that still means 30 years of jobs, of people making things. So maybe investors lost money? Name of the game for them. Obviously for the last employees its not too great though (all the more reason for nicer safety nets)
As for why these companies deign to exist at all, they're just like most actual business: they make enough to keep going, perhaps some growth on the horizon, people put food on the table, and build careers.
Not every venture has to end in an IPO and unending explosive growth, nor are those that don't "failures".
If every funded company had to pay back every dime of VC investment upon "failure", no one would take risks. That's the game and VC's are OK with it.
The most likely outcome is what VCs call "zombies" - companies that can cover their operating costs, but can't pay back their investors. They're a headache for VCs, because they won't die and require attention. YC seems to be designed for force startups to fail fast, so they don't end up with a huge portfolio of zombies.
For non-founder employees, the implicit deal with working for startups has always been, "We pay you below market wages, but make it up in equity. Then, when we go public or get bought, your equity stake turns into a cash-out that makes up for your years of below market wages." If a startup plans to remain a private business forever, then it's no longer making that implicit deal, and therefore will probably have to pay market wages (i.e. the same wages as Google or Apple) in order to retain employees.
EDIT: This is why I always ask about the company's exit strategy during the interview. If they're not planning to get acquired or go public, then I know I have to make adjustments in the structure of the compensation I ask for accordingly.
I have no clue why people think IPOs are the only way to go liquid.
And going public does enhance your value - ceteris paribus.
When we talk about "liquidity" we're talking about the ability to sell your assets, not the ability to derive a cash income (dividend) from it.
And a share in a public company is almost always going to be more liquid than a share in a private company.
[0] http://www.sciencedirect.com/science/article/pii/S0304405X06...
Your comments left out the #1 overriding reason for the IPO: It's to raise money for growth. The IPO is a means to an end and not the end goal itself.
A company can try to _raise money_ (let's say $1 billion) a few ways:
+ bank loan -- an old 100-year old company like Boeing with a track record can get a bank loan. A startup with no collateral cannot.
+ corporate debt -- again, Boeing has a track record of revenue and profits and can issue commercial paper that ratings agencies can assign a risk (AAA, B, etc) that bondholders will buy. Boeing's bonds rated AA pay 8%. A startup's attempt to issue debt notes would be classified as "junk bonds" and they'd have to pay crazy interest (30%?) to attract bondholders to take on that risk of not getting paid back. Also, if the startup has no revenue/profits, they don't have money to pay the regular interest payments.
+ divest, sell some assets -- again, a company like Boeing can sell off some piece of themselves they don't need. Boeing recently sold off their cybersecurity business for millions. A startup doesn't have any subsidiaries, manufacturing plants, or unneeded technology patents they can sell.
+ equity offering a.k.a. IPO -- sell shares of the company to the public. As a plus, this can raise more money that the previous methods. This option is open to startups.
Sure, it's possible for startups to "raise money" by bootstrapping and let profits fund the growth. However, the point of the IPO is to raise money exponentially faster than bootstrapping.
So, companies don't just go public purely for the sake of "going public". They want to raise money and the other options for doing so are not available to them. If the startup doesn't need to raise money, they don't need an IPO.
All that being said, a cynical person can still say that VC's and founders can still push for an IPO more for "cashing out" instead of "raising money". It's possible to have that hidden agenda, but that's not the majority of cases. When a company starts the process of an IPO, the underwriter (Goldman Sachs, Merrill Lynch, etc) and the company management have to go on a "road show" to convince potential buyers (pension funds, etc) that they have growth ideas that will make wise use of that money. Having a pre-IPO Powerpoint slide that says, "we want to your money because the founders and VCs want liquidity to cash out" isn't going to convince people.
So, "why would founders want the pressure and stress of shareholders?" ... it's because they wanted the shareholders' money. Same thing as wondering why Joe Blow "wants the stress of a boss?" ... because Joe wants a paycheck... it's just that the "boss" came with that salary.
Corporations raise capital by selling bonds, by reinvesting profits, by getting money from VC's and through other means. That companies rely heavily on public markets to raise money is a mythology promulgated by people like the quoted Nasdaq employee. The percentage of capital raised by corporations that has been done via initial or secondary offerings as opposed to other means has been miniscule. That is not new either, it has been that way since the 1940s, and even before that.
This situation has become another middle class driving down force going private/acquisition over public IPO. The public markets have a key role in our economy and wealth growth across the board, private equity and acquisitions not as much.
Only the hugest successful startups may find private markets too constraining in this environment.
This means that either companies need to be acquired, or they need to go public. If someone is investing a billion dollars, you'd want to be acquired for 10+ billion in order to have been a good investment. I think this makes IPO a more likely outcome at those investment levels.
My favorite CS analogy is the Global Interpreter Lock. It had good intentions and in the single core world that it was invented in, it probably made sense. Now that we know better nobody is going to make that mistake again, but now everybody is up to their necks in legacy code and the only way to get out of it is a full rewrite.
Companies that are built with a true mission and sense of purpose, for the (very) long-term, and are either already profitable on their way to profitability without raising additional money do not have any real reason to go public aside from greed. This concept is so against the common mindset that it seems very few people are able to see that. The original intent of going public (i.e. prior to 20th century), was precisely because there was no easily accessible venture capital like there is today, so that was pretty much the only way to raise significant funds.
That explains why so many companies that IPO seem like quasi-pyramid schemes, driven more by money than a long-term sense of purpose, a la Groupon or Zynga. Although of course that could be said about most public companies, hence why most go to shit, but I'd argue that companies like Kickstarter do not have constantly increasing profit as a primary goal (of course profit is one of its goals, otherwise it won't be around long, just not the primary goal).