With Twitter’s blockbuster Initial Public Offering (IPO) behind us, many entrepreneurs are probably itching for their chance to get their own ticker symbol and be celebrated on the trading floor. I was certainly excited about my IPO when I decided to take a business and consumer database company I had founded over 40 years ago, InfoUSA, public in 2003.
I quickly learned, though, that running a public company isn’t as glamorous as Jack Dorsey might lead you to believe. In just a few years, I had to deal with shareholder grievances, analysts’ projections, and finally, SEC accusations. I ended up selling the company, not only to get away from all the hassles of running a public company, but to return to the fun of being an entrepreneur.
For any of you dreaming of those stock exchange festivities, I urge you to reconsider. If anything, at least make sure your reasoning is solid. I can tell you, from my own experience, that your logic may not be as sound as you think. So please indulge me while I act as your voice of reason.
The Voice of Reason: You might think that going public is a good way to raise a lot of cash and fast. It’s actually not that simple. Most of the assets you gain from an IPO will be in company shares. It’s very difficult to sell these shares and usually there is a limit to how many you can sell. So, while going public does bring in a lot of capital for the business, it won’t very quickly or easily provide you with a lot of usable money. Your best bet for a liquidity event is to just sell your company. You won’t have to deal with the tedious, bureaucratic process of extracting money from assets tied with a public company. Chances are you don’t need liquidity. So try to focus on nurturing and growing the business. That’s what I am doing now my new startup, InfoFree.
The Voice of Reason: Obviously, you want to repay the people who provided the financial backing needed to grow your company. However, it can be tricky to please both your venture capitalists and your entrepreneurial spirit. Going public means making yourself accountable to shareholders and losing some ability to follow your own destiny. If you do decide that going public is the best option, make sure you create two classes of stock, Class A and Class B. Class A stock is non-voting, meaning that those who own those stocks cannot interfere with how the company is run, or your vision to innovate. Only those with Class B stock can vote on major company decisions. With Facebook, for example, Mark Zuckerberg only owns 22% of the company, but he owns 57% of the voting stock, meaning he is still in control.
Even though dual-class stock might seem like the answer to all of your IPO quandaries, be warned that it doesn’t fix everything. Investors tend to be more wary of companies with dual-class shares, and those companies are often more likely to underperform. In fact, Google recently settled a lawsuit after creating a third class of voting stock that would compensate non-voting stockholders for the loss of income that is likely due to the creation of a new class of stock.
The Voice of Reason: There’s a certain amount of prestige associated with having the company you founded listed on a stock exchange. Maybe you’re looking at that IPO as a way to share your success with the world. I’ll admit I had that same pride when I was announcing the IPO of the company that I had nurtured from a pile of phone books in my garage to the multi-million dollar enterprise it had become. What I didn’t realize until it was too late was, in exchange for an ego boost, I gave away control and inherited a whole lot of hassles.
With an IPO, you are effectively parting with your control. Whereas, by staying private, you are the sole leader; every major decision has to go through you and you alone are able to choose the path your business will follow. No board of directors, no audit committee, no compensation committee, no public accountants, no securities lawyers, no SEC, and no analysts. Just you and the team you trust and that believes in you as a leader. Your team are your true shareholders and should be your focus. Wall Street investors all too often want to buy and sell very quickly--long-term can mean 30 days.
So if that’s what you really want, say goodbye to those ideas; you won’t have enough time to cultivate them before you have to prove profitability to your shareholders.
While you’re at it, say goodbye to your entrepreneurial spirit. Entrepreneurs are supposed to spend their time creating, innovating, and growing the business and themselves. Once you go public, you will be stuck in a bureaucracy, filling out forms and responding to your shareholders. I once fell for the IPO fantasy but now, with the confidence that can only come from having had the experience, I can say I am cured. I enjoy my time, my money, my entrepreneurial spirit, and most of all my freedom.
--Vin Gupta is founder of InfoFree.com, a database creation and sales leads company. Vin was also the CEO of InfoUSA, a company he founded in 1972 and took public in 2003. The company was sold in 2010 for $680 million.
[Image: Flickr user Anthony Quintano]