Bill Gurley penned a fantastic post about IPOs yesterday. Bill presents a very compelling case that IPOs still have a role to play in the startup ecosystem and he also puts forth some strong data suggesting that the IPO market is coming back and good companies are taking advantage of it.
But my favorite part is his counterargument to the point that Wall Street forces entrepreneurs and managers to run their companies with a short term focus (an issue I've long been concerned about).
One recent argument knocking the IPO is as follows: Wall Street is too short-term focused, and that if you want to run your company for the long-term you should remain private. There are three great reasons that this “can’t focus on the long term” argument falls short — Jeff Bezos, Marc Benioff, and Reed Hastings. All three of these amazing entrepreneurs turned CEOs took their company public on a standard IPO time frame. They also all three conveyed to Wall Street that they would postpone short-term earnings results in order to chase a greater long-term objectives and ambitions. The intelligent mutual fund investors that were swayed by their convincing arguments (there were many) were handsomely rewarded. Furthermore, Bezos, Benioff, and Hastings all three used “being public” as a bully-pulpit to tell their version of their industry’s story, thereby aiding their advantage. If you are unconvinced go ask Steve Riggio, Tom Siebel, or Blockbuter CEO Jim Keyes.
Back in the late '90s, my prior firm had somewhere between a dozen and two dozen IPOs out of a portfolio of 50 some names. Many of those IPOs ended badly as the companies failed and were sold for way less than the offering price. That experience taught me a great deal and as Bill notes in his post, I've been bearish on IPOs since then.
However, even in my most bearish posts on the topic, I've always said that the best 10% of venture backed companies ought to at least consider an IPO. If you are operating a business with the potential of a Netflix (NASDAQ:NFLX), an Amazon (NASDAQ:AMZN), or a Salesforce (NYSE:CRM), then you are in a different league and the IPO should be in your playbook. Whether you actually call that play is another story, but it needs to be there.
We have close to forty portfolio companies now and I can easily count four of them that someday will make great public companies. In my view, you need to be able to say yes to all of the following questions to have a great public company:
- Market Leader
- Sustainably Profitable
- Strong Top Line Growth for as Far as You Can See
- Strong Management Team With Public Company Experience in the Key Places
- A Willingness to Build the Company Without Regard to Short Term Stock Price Movements
- The Ability to Credibly Trade at a Billion Dollars of Market Cap or More
If you have a company that fits that bill, then you should absolutely be thinking about an IPO. But if you don't, then you should think about some other approaches to exit, most likely M&A to a strategic or financial buyer. You may also want to consider secondary sales to provide liquidity while the company continues to build toward an IPO or a sale.
Bill's post is well timed. The startup sector is on an upswing and there are quite a few really strong businesses out there sitting in venture capital portfolios. If those companies and the VCs behind them are careful and thoughtful about going public, and if only the best companies choose that route, we could see a healthy and vibrant IPO market for startups reappear in the coming years.