A Rising Number of Startups Reckon They'll Never Go Public

http://www.bloomberg.com/news/articles/2016-03-18/a-rising-number-of-startups-reckon-they-ll-never-go-public

by petethomas • 10 years ago

91 80 10 years ago

bloomberg.com

fahrradflucht• 10 years ago

Nasdaq Private Market surveyed 126 attendees, of which 32 percent were founders or chief executives

You ask 126 people at SXSW and then make that story out of it? I think that's a little bit to much.

readams• 10 years ago

And it's an organization that provides services to companies that don't go public.

dawhizkid• 10 years ago

Is this really that surprising?

jamesblonde• 10 years ago

No for readers of HN. But for Bloomberg subscribers, maybe.

akulbe3• 10 years ago

Why is this _the_ goal? Seriously.

Everything eventually goes to shit once a company goes public.

In the beginning, it was about some kickass product/service. The focus is on making something good, offering a good service.

Once a company goes public, the all-consuming reason for existence changes. Now it's no longer about the good product/service. It's only about increasing value for shareholders.

This begets mergers and acquisitions, which begets mass layoffs. (Where CEO gets more fat pockets than he had already, shareholders get a little more than a pittance, and hundreds if not thousands of employees get the shaft.)

Why not bootstrap, and get money the old-fashioned way, by working your ass off? You know, building something YOU control, and that you're not beholden to shareholders for?

Build something to last instead of looking for an exit?

I left my last job of 8.5 years, the longest I've ever been at any one job, to go out on my own. Sure, it's a risk.

My employer was in the process of an acquisition, and it completed after I left. Then articles said they were planning on laying off 10% of staff. It's hit 20% now, and no end in sight.

deepGem• 10 years ago

You are assuming "The focus is on making something good, offering a good service" and "maximising shareholder value" are opposites. That need not be the case. Amazon is a classic example.

astrostl• 10 years ago

Amazon is a famous example of not maximizing shareholder value by reinvesting into R&D, no?

hkmurakami5• 10 years ago

If you take VC money, your goal becomes the VC's goal.

VCs need a liquidity event to happen within the expiration of the fund that they wrote the check from. IPOs are theoretically unbounded in terms of availability.

akulbe3• 10 years ago

I would say this is all the more reason not to take VC money, but bootstrap on your own. Why give up control?

erdojo3• 10 years ago

Layoffs are extremely common at startups too. They just don't make the news.

akulbe3• 10 years ago

In the case of $FORMER_EMPLOYER, we're talking about 1600 people out of work. (I know, I know, larger corps have had it worse) For what? So the C-level dudes can have a good balance sheet?

It just makes me sick.

tryitnow3• 10 years ago

Capitalism. Sure, you can go it alone, but if you're making good profits in your niche you better expect a well-capitalized competitor to come sniffing around.

And when they find out you're minting money they'll jump in and undercut you on price, poach your talent, replicate your product (but not all the costs you put into development), and then do everything to out-compete you. And then your profits start to corrode. And eventually you're either forced to sale or forced into ever more narrow niches.

Public companies have a cheaper cost of capital, which means they can, over time, outcompete non-public companies.

There's a few exceptions to this like private-equity backed companies, and large closely-held private super firms like Koch, Cargill, etc. But if anything these firms are even more ruthlessly capitalistic than public companies.

There's no way around this unless you occupy a very well-protected space that big companies wouldn't find profitable.

I think it's becoming increasingly more difficult to find such spaces in software.

derefr• 10 years ago

In other words: if there's a healthy market with three equal players (A, B, C) and you, as A, don't merge with either B or C... then B and C are going to merge, and the newly-formed B+C is going to use its increased efficiency to outcompete you.

At the highest levels, this is considered monopolism, and measures are put in place to avoid it... but at its lower levels, this is just "everything working as expected" in the engine of capitalism.

liquidise• 10 years ago

I suspect i am going to echo a lot of the cynicism that has been surrounding the high rollers startup coverage lately, but quite frankly... why would they go public?

As far as i can see, the invented heave-ho of a demonstrably unprofitable business into IPO is troubling. These businesses are not designed for profit, but for [unsustainably costly] growth. Sure the IPO may earn the founders millions, but is it worth the stress that comes along with it? Invariably investors want to make money. Often times the IPO play feels like they are earning their money by throwing the founders to the hungry masses.

How many companies have we seen repeat this pattern and suffer massive morale hits? The (my company failed/i was asked to step down/i wish i still controlled my company) blog posts paint a telling tale of what looks to me like a failed experiment.

I've never exited for millions so maybe there is a sense of accomplishment i am missing here, but count me out. I can't imagine an amount of money that would justify feeling like what was once my weekend project has grown to something beyond my control. That it has left me embattled with investors and then a public funding round i feel like i can never satisfy.

I don't get the sense the zombie unicorns are fulfilling dreams. Instead, i get the impression they are keeping people up at night.

kgwgk• 10 years ago

A more cynical question: why do these companies exist at all? From the wikipedia definition of business: "The goal is for sales to be more than expenditures resulting in a profit."

Wasting other people's money until the end of time is not a sound business model. If they are not designed for profit the design has to change at some point in time, even if it this means morale hits and keeping people up at night.

cel1ne• 10 years ago

I feel that many investors go by "Thousands of people know and use it, so... It must be worth something." The IPO then is a possibility for the founders to get paid by selling their unprofitable business to the public.

rtpg• 10 years ago

A lot of magazines and some newspapee act like a money pit, basically at the mercy of the rich benefactors paying to run it.

And even if a company folds after (say) 30 years, that still means 30 years of jobs, of people making things. So maybe investors lost money? Name of the game for them. Obviously for the last employees its not too great though (all the more reason for nicer safety nets)

crispyambulance• 10 years ago

VC investors know what they're getting into. Every investment is a gamble and that's OK.

As for why these companies deign to exist at all, they're just like most actual business: they make enough to keep going, perhaps some growth on the horizon, people put food on the table, and build careers.

Not every venture has to end in an IPO and unending explosive growth, nor are those that don't "failures".

If every funded company had to pay back every dime of VC investment upon "failure", no one would take risks. That's the game and VC's are OK with it.

knughit• 10 years ago

"going public" means taking investment from the general public, nothing to do with profit level.

quanticle• 10 years ago

I suspect i am going to echo a lot of the cynicism that has been surrounding the high rollers startup coverage lately, but quite frankly... why would they go public?

For non-founder employees, the implicit deal with working for startups has always been, "We pay you below market wages, but make it up in equity. Then, when we go public or get bought, your equity stake turns into a cash-out that makes up for your years of below market wages." If a startup plans to remain a private business forever, then it's no longer making that implicit deal, and therefore will probably have to pay market wages (i.e. the same wages as Google or Apple) in order to retain employees.

EDIT: This is why I always ask about the company's exit strategy during the interview. If they're not planning to get acquired or go public, then I know I have to make adjustments in the structure of the compensation I ask for accordingly.

fsloth• 10 years ago

There is the possibility of being bought by a larger company. I've known technology startups have this as the main exit strategy and succeeded.

tankenmate• 10 years ago

Another point you need to consider is that private acquisitions typically cost a 15% to 30% discount on the P/E multiple compared to their public brethren; liquidity (in this case convenience liquidity) costs money.[0]

[0] http://www.sciencedirect.com/science/article/pii/S0304405X06...

brianwawok• 10 years ago

If you don't found in the valley, Market wages look a lot better.

jasode• 10 years ago

... why would they go public?

Your comments left out the #1 overriding reason for the IPO: It's to raise money for growth. The IPO is a means to an end and not the end goal itself.

A company can try to _raise money_ (let's say $1 billion) a few ways:

+ bank loan -- an old 100-year old company like Boeing with a track record can get a bank loan. A startup with no collateral cannot.

+ corporate debt -- again, Boeing has a track record of revenue and profits and can issue commercial paper that ratings agencies can assign a risk (AAA, B, etc) that bondholders will buy. Boeing's bonds rated AA pay 8%. A startup's attempt to issue debt notes would be classified as "junk bonds" and they'd have to pay crazy interest (30%?) to attract bondholders to take on that risk of not getting paid back. Also, if the startup has no revenue/profits, they don't have money to pay the regular interest payments.

+ divest, sell some assets -- again, a company like Boeing can sell off some piece of themselves they don't need. Boeing recently sold off their cybersecurity business for millions. A startup doesn't have any subsidiaries, manufacturing plants, or unneeded technology patents they can sell.

+ equity offering a.k.a. IPO -- sell shares of the company to the public. As a plus, this can raise more money that the previous methods. This option is open to startups.

Sure, it's possible for startups to "raise money" by bootstrapping and let profits fund the growth. However, the point of the IPO is to raise money exponentially faster than bootstrapping.

So, companies don't just go public purely for the sake of "going public". They want to raise money and the other options for doing so are not available to them. If the startup doesn't need to raise money, they don't need an IPO.

All that being said, a cynical person can still say that VC's and founders can still push for an IPO more for "cashing out" instead of "raising money". It's possible to have that hidden agenda, but that's not the majority of cases. When a company starts the process of an IPO, the underwriter (Goldman Sachs, Merrill Lynch, etc) and the company management have to go on a "road show" to convince potential buyers (pension funds, etc) that they have growth ideas that will make wise use of that money. Having a pre-IPO Powerpoint slide that says, "we want to your money because the founders and VCs want liquidity to cash out" isn't going to convince people.

So, "why would founders want the pressure and stress of shareholders?" ... it's because they wanted the shareholders' money. Same thing as wondering why Joe Blow "wants the stress of a boss?" ... because Joe wants a paycheck... it's just that the "boss" came with that salary.

emcq2• 10 years ago

What is a fair compensation package for early hires if companies continue to keep stocks private and less liquid?

phillc732• 10 years ago

A decent salary, with leave benefits similar to a lot of other Western countries (4-5 weeks annual leave, sick leave, parental leave)?

emcq2• 10 years ago

That sounds great! That should happen regardless.

Put another way what does the investor gain putting money in a company that stays private?

elliotec2• 10 years ago

In other words, just what you'd think a fair compensation package would look like.

MC7447a• 10 years ago

You do realize that in those other Western countries developers make far less than in the US? Even in the richer Western European countries like Germany, France, Netherlands, Sweden, etc, $50-$90k is pretty typical for 5yr+ experienced software engineers. Yes, that's total, not base, and before taxes which are higher than in the US.

dclowd9901• 10 years ago

Most salaries don't even come close to the total comp package of a public company (after RSUs/options/etc). I'm talking maybe 1/2.

optforfon• 10 years ago

But... the whole point of compensating with stock is that they don't have the funding to pay more....

You can say "well they shouldn't hire people they cant afford" but that's not very realistic. When you start a company in your garage everyone is making sacrifices b/c they think they'll cash out later.

rdl• 10 years ago

2-3 weeks leave plus 2 weeks of holidays throughout the year plus sick time plus flexible schedule isn't that uncommon in tech. Maybe not in the earliest stage startups (although flexibility matters more than absolute hours for both employee and employee, in a lot of cases, if you enjoy what you're doing), but in Series C+ companies.

hkmurakami5• 10 years ago

Even with the current compensation packages, if you add a clearly defined and always-exerciseable company buyback provision to the equity, it could be okay.

(obviously the terms need to be actually equitable rather that being designed to screw over the employee)

venomsnake• 10 years ago

Dividends. I know it is a mythical beast, but isn't that the whole point of owning part of a business.

devit• 10 years ago

They could issue dividends or in theory offer something equivalent like "futures" offering to pay X% of the company revenue or profits in Y years or a legally binding promise to buyback stock on a future date at a valuation based on revenue or profits.

jonathankoren• 10 years ago

Follow on question: How can a company with no hope of an equity windfall for the employees attract and keep talent?

Second follow up why would I join a company that will never go public, after the founders took money off the table?

erdojo3• 10 years ago

VCs need an exit to get a return. If not an IPO, then an acquisition. Unless of course the company becomes insanely profitable and can buy out their investors at a nice multiple.

Silicon Valley may be good at multiples, but not so good at profitability.

Acquisitions by private companies aren't as common as public companies, and the valuations aren't typically as high. So if everyone stays private, there aren't as many opportunities for 10x+ exits. Which means there's less cash to invest in high risk startups. VC's depend on the big winners to cover the countless losers.

If startups bootstrap, then they need to make money early. Which means you can't hire until you make money, but you can't make money unless you hire. So ambitions are seriously limited in the first couple of years. As are salaries. Not easy to attract great developers when you can't afford to pay them.

On the flip side, bootstrapping a company and focusing on building products that people not only love but are willing to pay for is insanely satisfying. There's also a lot of upside to working with a small team for many years before scaling.

hkmurakami5• 10 years ago

VCs need an exit to get a return. If not an IPO, then an acquisition. Unless of course the company becomes insanely profitable and can buy out their investors at a nice multiple.

In addition, the exit must occur within the maturity term of the VC's fund.

hamburglar• 10 years ago

What happens at the maturity of the fund of the company is still chugging along but hasn't had a liquidity event?

hkmurakami5• 10 years ago

This data seems pretty meaningless without being able to tie their sentiments to their funding situation.

drawkbox• 10 years ago

Employees and regular investors never get a chance to invest when companies don't go public, it is unfortunate. However, it is very difficult and it can destroy a company going public.

This situation has become another middle class driving down force going private/acquisition over public IPO. The public markets have a key role in our economy and wealth growth across the board, private equity and acquisitions not as much.

Ologn• 10 years ago

no immediate plans to pursue the public markets to raise capital

Corporations raise capital by selling bonds, by reinvesting profits, by getting money from VC's and through other means. That companies rely heavily on public markets to raise money is a mythology promulgated by people like the quoted Nasdaq employee. The percentage of capital raised by corporations that has been done via initial or secondary offerings as opposed to other means has been miniscule. That is not new either, it has been that way since the 1940s, and even before that.

saosebastiao• 10 years ago

This has a lot less to do with VC preferences or entrepreneur preferences or even market preferences and a lot more to do with Sarbox. Anyone who has worked for a publicly traded company has run into some bullshit bureaucratic requirement caused by Sadbox that makes no sense, whether they realize it or not. It is pretty well established in economic research by now that Sarbox has affected the capital environment away from IPOs and more towards VCs and Private Equity.

My favorite CS analogy is the Global Interpreter Lock. It had good intentions and in the single core world that it was invented in, it probably made sense. Now that we know better nobody is going to make that mistake again, but now everybody is up to their necks in legacy code and the only way to get out of it is a full rewrite.

yuhong2• 10 years ago

I really wish the restrictions can be reduced so @pmarca etc can tweet more on the companies of which they are directors. I am thinking that Reg FD should be pretty broad too, making it clear that most public social media posts qualify while private ones may not be (providing list of examples would be a good idea).

sjg0072• 10 years ago

IPOs will come back. Too many people are pissed off that their vested equity is locked up and effectively worth $0.

ChuckMcM• 10 years ago

Ha, funny story. "Hi we're a private market company that will give your employees liquidity if you'll let us, no need to go public with all those regulations and everything!"

I get that this is what the secondary markets would like after all a stock market without pesky regulations is so much easier to make profits on if you control the market, than one where you have things like "rule FD" and that whole insider thing which everyone hates right?

Here is my prediction, the secondary market stuff will grow for the next 5 years. Once really significant sums are passing through it there will be a big scandal that wouldn't have happened in a more regulated market and the government will swoop in and regulate it in a similar way eliminating much, if any advantage.

sjg0072• 10 years ago

I agree. I also expect to see secondary markets that raise equity via crowd funding.

Animats2• 10 years ago

What the guy from "Nasdaq Private Market" seems to be pushing is a semi-public offering - like an IPO, but only for "qualified investors". This provides an exit for the original investors.

anovikov• 10 years ago

Why the worry? It is just that the private equity markets have developed well enough to make IPOs unnecessary for the vast majority of even very successful companies. Why IPO if billion (ok, at least centimillion) dollar VC rounds became the norm?

Only the hugest successful startups may find private markets too constraining in this environment.

scrabble• 10 years ago

VC are not donating money. They are investing. In order for them to be successful, there must be a return on their investment.

This means that either companies need to be acquired, or they need to go public. If someone is investing a billion dollars, you'd want to be acquired for 10+ billion in order to have been a good investment. I think this makes IPO a more likely outcome at those investment levels.

maxlamb• 10 years ago

reminds me of a related and interesting read on an interview with Kickstarter's founder/CEO on why he doesn't want to sell or ever go public: http://www.fastcompany.com/3051328/fast-feed/kickstarter-ceo...

Companies that are built with a true mission and sense of purpose, for the (very) long-term, and are either already profitable on their way to profitability without raising additional money do not have any real reason to go public aside from greed. This concept is so against the common mindset that it seems very few people are able to see that. The original intent of going public (i.e. prior to 20th century), was precisely because there was no easily accessible venture capital like there is today, so that was pretty much the only way to raise significant funds.

That explains why so many companies that IPO seem like quasi-pyramid schemes, driven more by money than a long-term sense of purpose, a la Groupon or Zynga. Although of course that could be said about most public companies, hence why most go to shit, but I'd argue that companies like Kickstarter do not have constantly increasing profit as a primary goal (of course profit is one of its goals, otherwise it won't be around long, just not the primary goal).

tryitnow3• 10 years ago

So, if I'm an LP in a VC firm how do I get my money back?

Clipping dividend coupons like a retiree? If I wanted to do that I'd invest in dividend paying public companies and bonds.

I'm all ears, tell my why any sane LP would want to invest in VC right now.

Much of the so-called returns VC's have experienced have been paper returns due to ever higher valuations placed on portfolio companies.

But then when those companies get widespread scrutiny (which all going public really is) then you're luck to not lose more than 10%.

So I'm paying VC asset management and performance fees for the privilege of losing money?

I'm unclear how this is sustainable.

I think this bubble has gone on for longer than the last one in part because there are fewer public companies and less hard-nosed scrutiny of these companies.

yuhong2• 10 years ago

I think automatic monthly dividends from VCs would probably not be a bad idea.

A Rising Number of Startups Reckon They'll Never Go Public

Related Stories