Why Going Public Doesn’t Make Sense Right Now
This year has been better for IPOs than 2016, but not that much better, which is surprising given the stock market’s strong performance. In fact, many analysts expect that although 2017 will top last year, we will still see fewer companies go public in 2017 than in 2015. The poor performance of the two most hyped IPOs this year—Blue Apron and Snap—hasn’t helped boost enthusiasm for going public; both are currently trading far below their initial offering price.
So why go public? It’s a good question. As co-CEO of a privately held software company that has never taken outside investment, and a former senior executive at VMware, I can say with confidence that there’s little advantage for a private company to go public in current market conditions.
By going public, companies chain themselves to quarterly performance goals, which makes it extremely difficult to execute the kind of long-term strategy that creates a truly great company. Investors may tolerate lower profits, and even losses, so long as growth remains robust, but patience is not their strong suit. At some point, usually sooner rather than later, companies that make big investments that take a long time to pay off will be punished by a falling stock price. This leaves the company vulnerable to acquisition or a hostile takeover, and it crushes the morale of employees, whose 401(k) plans and stock options depend on their shares gaining value.
Second, as a public company, executives have much less room to maneuver. Not only is the company expected to meet or exceed analysts’ quarterly performance expectations, but disclosure requirements mean that the leadership team must telegraph, if not outright state, its strategy. This makes it difficult to quickly change direction to take advantage of a market opportunity, especially if the new course will have negative short-term ramifications for earnings. Any sudden deviation from a company’s stated strategy will be perceived by the market as weakness and vacillation, further driving down the stock price.
Pressure from investors and analysts require executives to spend precious time and resources wooing and placating them, restricting their ability to act quickly to seize opportunity. Short sellers scrutinize every disclosure for weaknesses, real or imagined, that they can publicize and exploit.
And the final indignity? For this loss of control, the company will pay millions simply to keep up with paperwork and reporting.
Of course, if you need a large capital infusion, the public markets can provide a ready supply. If your investors are clamoring for an exit, the public markets are certainly a ready option. And if you need to grow through acquisition, going public can give you currency in stock to go on a buying spree.
But if you don’t need additional capital or acquisitions to grow, there’s really no reason to go public, especially now. Privately held companies like Bose, MailChimp, and my own company, Veeam, continue to grow profitably at a rapid clip without the “benefit” of going public.
In the end, going public only makes sense as a last resort to satisfy investors, to raise capital that can’t be sourced elsewhere, or to make it easier to buy other companies. Frankly, given the recent examples set by Snap and Blue Apron, anyone who doesn’t need to go public right now would be crazy to do so.
Peter McKay is co-CEO and president of Veeam.