Many new startups, especially those in the tech and financial industries, dream of taking their companies public. The visibility and opportunities presented by an initial public offering (IPO) are tremendous, but is it really the right path for your business now?
Business leaders who have had to make the decision of whether or not to go public shared the pros and cons of each side, and offered advice for making this choice for your own company.
Why go public?
Going public can help your company grow immensely, both in terms of brand awareness and the financial bottom line, said Kevin Hrusovsky, executive chairman and CEO of Quanterix.
“The influx of capital that typically comes along with an IPO can be the fuel to the fire of company growth,” Hrusovsky told Business News Daily. “Going public can help legitimize your company in the market and in the minds of potential investors or customers.”
For Brian Stafford, CEO of Diligent, his company’s public status gave it the credibility needed to grow quickly, in a transparent, accountable way.
“Being public … allowed us to not just raise funds in a way a private company may not, but also signal to our customers that we were committed to growth,” Stafford said.
Because of this awareness and accountability, your business is more likely to receive larger amounts of capital from investors, said David Hahn, SVP of product management at Integral Ad Science. It also gives your employees, founders and investors a well-deserved return on their investment in your company: Publicly traded stock allows stakeholders to attach a definitive value to that investment, which they can potentially sell if they choose, Hahn said.
Why stay private?
Although the growth opportunities that come with an IPO are tremendous, there are some downsides that may make a business owner think twice. Hahn noted that public companies are exposed to market pressures, regulations and disclosure requirements. Private companies, on the other hand, have much greater autonomy and freedom to make decisions. [See Related Story: Is Startup Creativity DOA With IPO?]
Michael Parrella, founder of iLoveKickboxing, decided to keep his business private and become a franchise in order to grow, rather than accept an IPO.
“It was all about quality control for me,” Parrella said. “I had a vision for how I wanted the brand to be received and the type of experience I wanted consumers to have. Franchising seemed about the only way I could ensure that my vision was carried out.”
“As the CEO, I am not comfortable with all the requirements and regulations regarding running my business that would be required with a public company,” Parrella said.
Similarly, Stafford’s company went public nearly a decade ago, but has since returned to being privately owned, so that Diligent’s operations are under less external scrutiny.
“Being public afforded us access to capital that was tremendously important to our growth,” Stafford said. “With our position firmly in place, we sought the financial flexibility to continue executing on our long-term vision. Now as a private company, we have the ability to be much more acquisitive and to focus on product development, innovation and productivity, versus short-term market reaction.”
In addition to stricter limits on your business decisions, IPOs can be very expensive and time-consuming, Hahn said: “They can be a distraction to growing companies.”
Hrusovsky agreed, noting that the financial and managerial strain of an IPO can take its toll on a business.
“You’ll have to learn to manage additional stakeholders and investors as well as new reporting structures, all of whom have unique expectations and goals which can be frustrating and time consuming,” he said. “As such, it is important to be able to align investors and key stakeholders with the business and its goals [as a public company].”
What’s right for your business?
The decision to become a public company is a big one, and there are a lot of factors you need to consider. It requires ongoing commitment, time and investment by the company, as well as fundamental changes in how the business operates day-to-day, Hahn said.
“I would suggest executives and board members consult experts and experienced people who have knowledge of the process, benefits and risks of taking a specific type of company public,” he added.
Timing is important, as well. Hrusovsky reminded business leaders that if they’re considering an IPO, they should think about doing it when it makes the most sense for both the company and the market.
“If you don’t have interest for your product or service as a private company, more likely than not, the market demand is not strong enough for you to be a successful public company,” Hrusovsky said. “Having the right team in place is also important. Without the right support, from entry-level employees to the executive bench, the road to an IPO is not a sustainable path.”
Finally, you need to remember that what works for your company now may not work in the future, so you must be adaptable and open to your ownership status changing, Stafford said.
“There is no ‘finish line,'” he said. “The goal is building a company that is built to last, and depending on the specifics of your company and industry at any given time, one [path] may be more helpful in your quest of profitable growth.”