Extreme IPO

Extreme IPO

The Initial Public Offering or IPO is often the end goal for venture-backed companies. It is an exit event for the institutional investors. It is at least a liquidity event for the founders and any employees with stock or stock options. But is it always in the best interest of the company to be public? If it is not in the best interest of the company is it in the best long-term interest of the founders, management and other employees?

Follow this link for a discussion of issues and problems arising from a exit strategy based on an exit event goal in a limited time frame, such as five years.

Leaving aside exit events, consider the defining characteristic of an IPO -- it makes a private company public.

For the company, being public has both advantages and disadvantages. A public stock is a kind of currency. It can be used to make acquisitions. It can be used to raise funds to invest in projects to stimulate growth and, if successful, to increase the value per share of the company.

However, being public also has disadvantages. There are significant costs involving in satisfying reporting requirements. Significant management time is occupied with investors relations, both directly and indirectly. Much more information must be made public, and therefore becomes available to competitors. Finally, there becomes a focus on the results every quarter, even when management believes the best long term results would come from a strategy that temporarily hurts short term results.

Because there are both advantages and disadvantages to being public, and because they both can be very important to the company, the decision to go public must be made for sound business reasons. It must be done at the time that is best for the company as an on-going enterprise. It should not be scheduled to fit the needs of investors for an exit event.

Therefore, Extreme Entrepreneurship does not depend on the IPO as the main method for return to investors and does not treat it as an exit event. The IPO becomes one event in the progression of the company as an enterprise. It occurs only when and if it is in the best interest of the company to be public.

On the other hand sometimes under Extreme Entrepreneurship the IPO may actually occur earlier in the company's life than under the conventional system. Because the IPO is not treated as an exit strategy, it does not need to be such a big "event." Under Extreme Entrepreneurship, the business plan looks out not just five years, but ten or fifteen years. Under an Extreme Entrepreneurship plan, the company will continue to grow with a target of, say, 40% per year for many years after the IPO.

If the business advantages of being public out weight the disadvantages, the company can go public with a small, less expensive IPO while it is still much smaller than for the typical "big event" IPO. The lack of an expensive road show and the other things that go along with a conventional expensive IPO will mean that there is less hyping or overselling of the stock at the IPO. Although this means that the IPO would be less successful as an exit event, it may help produce a better sustained long term value for the stock. Under these circumstances an Extreme Entrepreneurship company may have an IPO while a conventional company waits to grow big enough for an IPO as an exit event.