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IPO shouldn’t be the goal for a start-up

June 10th, 2009 · 4 Comments

A friend of mine started a company a few years ago. He quickly built up the company. Whenever I asked him how his company was doing, he always told me that their goal was to go public on the NASDAQ in a few years.

They had good revenue growth. They had impressive venture capital funding. But, I have been skeptical about their goal of going public. I’ve always felt that going public should be a by-product of a company’s success, but it shouldn’t be the goal for the company.

Let me tell you a story.

During the dot com bubble, two years out of college, I joined a "high profile" start-up. It received hundreds of millions of venture capital funding. Its board members consisted of several prominent venture capitalists. Its founder was a serial entrepreneur who sold his previous company for several hundred million dollars in the early days of dot com era.

The founder personally signed off on each new hire. When he was talking to me, he told me that he felt he was like John Elway, the legendary pro-football hall-of-fame quarterback of the Denver Broncos. John Elway was a great player for many years, but he never won any championship. He kept playing until his late 30’s. Eventually he won two super bowls. Similarly, for the founder, although he had made a lot of money by selling his previous start-up, he still needed the "ring"– for him, that meant to take a company IPO.

My hiring manager, a graduate of Harvard and Stanford Business School, told me that "it’s a different era now. Going public is all about telling a story. The rules have changed."

So, for the next two years, this company focused on having an IPO. It ended up selling itself at an incredibly cheap price after burning through almost $100 million in venture funding — for every share an employee has, he/she got $0.0001. For example, a senior-manager had 10,000 shares, and he got $1 back. This is a true story. 🙂

To make a start-up successful, management needs to focus on providing a product/service that address customer needs. It needs to focus on sales and profit. It needs focus on building the right company culture. If a start-up gets product, sales, profit and company culture right, a successful exit such as buy-out or IPO would be the icing on the cake.

IPO is a financing event that allows company to raise capital for expansion and operating purposes. It’s a byproduct of the company’s growth and success.

Going back to my friend’s company, they’re still doing all right, but they haven’t had their IPO. Competitive situation has changed. They had to go back to the drawing board, and change their product line-up. There is still a long way to go for having an IPO.

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Tags: Start-up Success

4 responses so far ↓

  • 1 kulkulkan // Jun 17, 2009 at 12:57 pm

    To build a business for the sake of doing so is idealistic BS.

    In order to achieve something, you need to have goals (which require goal-posts). IPO is just a goal-post. It might be M&A as well or some other liquidity event, or the goal may just be to stay private forever, and pass on the business to your family. Whatever the goal posts, one needs to have some defined goals on what they want to build and how to get there.

    So, I would argue the opposite. Just growing the business without having a tangible exit in mind doesn't make sense. In fact, I would suggest entrepreneurs and VCs alike should do an “exit analysis” every year to figure out how far away are they from their goals and the goal posts. Some boards already do this.

  • 2 GeekMBA360 // Jun 17, 2009 at 2:04 pm

    Thanks for your comments and different perspective!

    VC and entrepreneurs have different set of goals and objectives. VCs have a short time horizon and they want to get their money back and much more. For them, their goal is to have a great IPO or a lucrative M&A deals.

    However, as entrepreneur who is building the company, I think he/she needs to focus on profitability/product/organization. Focusing on the exit event will distract the entrepreneur. A lucrative exit event is a byproduct of profitability/great product/great organization/etc, but not the other way around.

    I'm not saying that the board shouldn't plan possible exit options — every company should have that analysis, like you said, annually. But, it shouldn't be the goal for the company. Take care of profit/product/organization, the rest will follow.

  • 3 kulkulkan // Jun 17, 2009 at 4:57 pm

    To build a business for the sake of doing so is idealistic BS.

    In order to achieve something, you need to have goals (which require goal-posts). IPO is just a goal-post. It might be M&A as well or some other liquidity event, or the goal may just be to stay private forever, and pass on the business to your family. Whatever the goal posts, one needs to have some defined goals on what they want to build and how to get there.

    So, I would argue the opposite. Just growing the business without having a tangible exit in mind doesn't make sense. In fact, I would suggest entrepreneurs and VCs alike should do an “exit analysis” every year to figure out how far away are they from their goals and the goal posts. Some boards already do this.

  • 4 GeekMBA360 // Jun 17, 2009 at 6:04 pm

    Thanks for your comments and different perspective!

    VC and entrepreneurs have different set of goals and objectives. VCs have a short time horizon and they want to get their money back and much more. For them, their goal is to have a great IPO or a lucrative M&A deals.

    However, as entrepreneur who is building the company, I think he/she needs to focus on profitability/product/organization. Focusing on the exit event will distract the entrepreneur. A lucrative exit event is a byproduct of profitability/great product/great organization/etc, but not the other way around.

    I'm not saying that the board shouldn't plan possible exit options — every company should have that analysis, like you said, annually. But, it shouldn't be the goal for the company. Take care of profit/product/organization, the rest will follow.

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