Comment by liquidise | Hacker News Reader

Comment by liquidise | Hacker News Reader

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I suspect i am going to echo a lot of the cynicism that has been surrounding the high rollers startup coverage lately, but quite frankly... why would they go public?

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.

>I suspect i am going to echo a lot of the cynicism that has been surrounding the high rollers startup coverage lately, but quite frankly... why would they go public?

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.

Another point you need to consider is that private acquisitions typically cost a 15% to 30% discount on the P/E multiple compared to their public brethren; liquidity (in this case convenience liquidity) costs money.[0]

[0] http://www.sciencedirect.com/science/article/pii/S0304405X06...

If you don't found in the valley, Market wages look a lot better.

There is the possibility of being bought by a larger company. I've known technology startups have this as the main exit strategy and succeeded.

Or the possibility of being profitable and paying dividends to owners like companies have done for centuries before now.

what do you mean??

It's possible to simply pay your shareholders out of your profits based on their stake.

I have no clue why people think IPOs are the only way to go liquid.

If a company is financially mature enough to pay dividends then it's mature enough to go public.

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.

Ah, good points. Thanks for the clarifications!

A more cynical question: why do these companies exist at all? From the wikipedia definition of business: "The goal is for sales to be more than expenditures resulting in a profit."

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.

VC investors know what they're getting into. Every investment is a gamble and that's OK.

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.

"Not every venture has to end in an IPO and unending explosive growth, nor are those that don't "failures"."

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.

A lot of magazines and some newspapee act like a money pit, basically at the mercy of the rich benefactors paying to run it.

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)

That's a small fraction of a percentage of the overall number of publications. It might work in big cities where there's prestige to be had in owning a publication, but there aren't hordes of rich people looking to lose money over bad investments for the sake of putting their names on a masthead.

I feel that many investors go by "Thousands of people know and use it, so... It must be worth something." The IPO then is a possibility for the founders to get paid by selling their unprofitable business to the public.

...And the public then hopes to sell it to a dumber fool.. And on and on. When do we reach the last person who actually wants to own the stock for its current value for its dividend and ownership benefits?

"going public" means taking investment from the general public, nothing to do with profit level.

>... why would they go public?

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.

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