Why going public is suicide for a startup Internet company
Published: Tuesday, October 9, 2012
Updated: Tuesday, October 9, 2012 22:10
Thanks to the success of Silicon Valley, there are new tech and Internet startups being formed every day in the hopes of reaching the same success as Facebook. With young tech startups, there are always important decisions that need to be made. What direction should the business go in? Where is the funding coming from? Who are we going to hire? Another question that many startups have now decided to ask themselves is whether or not they should offer an IPO and go public. Many new companies struggle with this question, which is surprising given how harmful going public can be for a young tech or Internet startup.
Many point to Facebook’s IPO flub as an isolated incident for Internet startups, but it isn’t the case if you look at other Internet and tech companies that launched with high IPO expectations. Pandora launched at around $16 and dropped to the low teens the day after. Despite an initial boost, Groupon has only gone downhill from its $20 IPO start and currently resides at a measly $5. Zynga, the creators of Farmville, had a promising IPO start at $10 a share and have now fallen to just a little over $2.
Going public tends to be a means of gaining funding, providing young startups with the cash they need. And while getting more money is always great, it turns your business over to the interests of shareholders rather than the interests of the company. Much of the value in a startup comes from its user base. While profits are important, startups spend a lot of their effort satisfying their customers. As Sean Parker’s character pointed out in “The Social Network,” when you have something that’s “cool” you don’t want to ruin it with advertisement. When a company goes public, revenue becomes the main interest for stockholders since they want a return on their investment. With companies like Facebook and Pandora, advertising is the main stream of revenue. However, advertisements tend to discourage users, and the more advertisements a site puts up, the more they push the patience of their users and open the door for competition.
Going public will also put your company under a lot more public scrutiny. While this isn’t necessarily a bad thing, it could pose a problem when a company bases its decisions around how the public would respond as opposed to what is best for the company. And in the case of a company like Netflix, sometimes they make decisions they think are favorable, but that in reality create an unwanted storm of public criticism. Also, analysts have noted that employees in these young Internet startups spend their time checking their brokerage accounts as opposed to other productive tasks when the company goes public. This kind of corporate culture can be harmful to startups that need to be firing on all cylinders.
But perhaps the greatest threat to an Internet startup in going public is the push for growth. This is what killed Groupon. With the decision to go public, Groupon’s venture capitalists wanted it to have a successful IPO. So they decided to push the company’s growth with an exorbitant amount of money for advertising. Though the company posted $645 million in revenue, they also posted a loss of $146 million. Given the amount of growth, people overlooked the loss of profits. However, when they realized that Groupon would not be able to sustain such growth, the stock started to fall to where it is today.
If startup CEOs, both present and future, are still unsure about the decision to go public, consider this. When you build a company, it is your baby and you have put more blood, sweat and tears into it than anyone else involved in it. Since its founding you have made decisions and decided a path that you see best fit. With the decision to go public, you will most likely hand over the reins to your shareholders, and if they are displeased with the company’s direction they can go so far as to replace you with someone they feel is more competent to be CEO, despite all you’ve done. The benefits of an IPO for an Internet startup are short-lived, and should be not considered a justification for going public.