There often comes a time in a young company’s life cycle when it’s apparent the business can’t grow any further on its own. But just because that initial momentum starts to wane doesn’t mean all is lost—in fact, far from it.
Companies that find themselves in this crossover stage typically face four options. Here’s what to consider when you’re plotting your next move.
Many companies that reach this stage are sold. In fact, plenty are bought up by larger players even before they hit this stage. The valuation of the company may be high enough to provide major financial rewards to the investors and the existing team. That can be an attractive option, especially when it’s tough to predict the company’s future path towards revenue growth and proﬁtability, even when the current forecast looks encouraging.
This was the case with our company, Siri, before it was bought by Apple in 2010. When the Siri team originally weighed acquisition versus a future IPO, we unanimously voted to continue as an independent entity. But as the acquisition offers became more attractive, four other factors came into sharper focus:
1. Siri had created a new category of virtual personal assistant, but competitors were racing to create their own, including Google, Nuance, Vlingo, and others. There was a serious question of how much lead time Siri had, even with its differentiated technology in AI and natural language understanding.
2. Both the team and investors could either cash out based on the company’s high current value, or else risk sticking it out as more competitors came on the scene, then go public two or three years later.
3. Apple’s offer represented an opportunity to fulfill the executive team’s vision of seeing Siri make a real global impact, by serving tens of millions of iOS users—something that wasn’t easy to pass up.
4. Siri had already resonated with consumers, but the revenue model hadn’t yet been proven. The cost-per-action (CPA) revenue model meant that Siri would be paid for leading consumers to a web service, like buying a movie ticket or making a restaurant reservation. But when it first launched, most of the functionality was used by consumers for free services, like checking the weather or a ﬂight status.
These four things considered, when Apple made its compelling offer, the board voted to accept acquisition.
If you need new capital to fund growth and want to continue on the path towards going public, but your investors and leaders want liquidity, you can seek another round of funding. New funding can provide either partial or total compensation for existing shares. Sometimes investors want liquidity for reasons of their own, like the state of their current fund. As for team members, completely buying out their shares is a bad idea, because it removes that person’s ﬁnancial motivation to help the company succeed. But sometimes buying a fraction of a team member’s shares will give her a level of ﬁnancial security that softens the all-or-nothing equation you might otherwise face.
In some cases, management and investors want to continue the venture but know it needs more clout to compete in a large market. It’s likely other private companies in the market have a similar problem, and a merger of equals makes sense.
In those cases, talent selected from both companies can manage the new company, and the two boards of directors can be consolidated. While they won’t receive cash, the investors will gain stock in the new company that is not liquid. This is generally the best bet when both companies want to pursue an eventual IPO, but each one feels that a merged enterprise will get a higher valuation to help it succeed later as a public company.
These sorts of mergers don’t happen enough. Egos clash and investors’ expectations diverge—usually beginning with the issue of who will become the CEO after the merger. There’s also company cultures to consider and the prospect of losing key talent, not to mention integrating the board and cutting some members, and then the likelihood of more time before becoming cash positive. Even so, this path is sometimes still worth those risks.
Do the CEO and key managers have what it takes to keep building a great company—one that can continue to thrive after going public? If the answer is no, then an IPO isn’t the answer.
But if so, then can you find a credible underwriter to lead the offering? Mark Goldstein, current head of ﬁnancial sponsorship at the Royal Bank of Canada (RBC), has had decades of experience in underwriting IPOs. Here’s how he described that process to us:
We had been invited by hundreds of companies seeking a sponsor for an IPO, and over my career I only selected about 30. The reason is that few management teams coming from a high-tech background have the ability to manage a public company. I looked for CEOs able to represent their companies on the basis of vision, product strategy, and execution skills. As investment bankers sponsoring an IPO, we cannot afford to disappoint the buyers of the offered stock by poor performance. So management credibility and track record are critical.
Of course, going public exposes the company to outside scrutiny. The report of its financial results has to be ﬂawless, otherwise there can be serious legal consequences. That’s then followed by a public conference call with investors where the CEO and CFO offer commentary on the ﬁnancial results and answer questions.
Once a company has gone public, its CEO and CFO must be able to represent it well in the spotlight. In other words, their roles change considerably, and how well those execs can handle these new challenges factors into whether an IPO is the best option.
This article is adapted from If You Really Want to Change the World: A Guide to Creating, Building, and Sustaining Breakthrough Ventures by Henry Kressel and Norman Winarsky. It is reprinted by permission of Harvard Business Review Press.