Entrepreneurs pour massive amounts of time and energy into building a team, developing new products, creating a culture, and raising money to reach what many consider “the big milestone:” an initial public offering.
Every founder who went through an IPO can agree that “ringing the bell” to open the trading day at Nasdaq or on the NYSE feels surreal. But the public rarely gets a look behind the curtain to see what happens in the days and months leading up to the big event and in the very public quarters that follow. This week on Zero to IPO, we spoke with five entrepreneurs about the IPO, the value in going public, and what the journey taught them about how they can run a business better. Here’s what we learned:
1) Don’t obsess over the one thing that isn’t working
Josh James, the founder of Domo and cofounder of Omniture, took both of his companies public. Neither of those IPOs went according to plan. Both times, he faced numerous roadblocks—from people underestimating him because he was a young CEO and negative media attention during the quiet period to investors who struggled to understand his business model.
After taking Domo public (his second IPO), it was hard for James to focus on anything except what had gone wrong. He also thought a lot about not meeting his employees’ expectations. However, a trip to Sun Valley following the IPO changed his perspective. He talked to CEOs who praised him for making it through the IPO—no matter the outcome. He realized then that he had, in fact, hit a significant milestone, and generated tremendous value for Domo. Despite setbacks along the way and hard work ahead, James had acquired a valuable tool kit for the future by going public—including access to capital for strategic transactions and increased recognition for recruiting.
2) It’s not a one-day deal
Right before Fred Luddy, the founder of ServiceNow, took his company public, Facebook had their IPO. Facebook stock did so poorly at first that people began referring to the IPO as “Faceplant.” On the roadshow, Luddy found that he had to justify the company’s value proposition to skeptical analysts who had just been burned in one of the most anticipated tech IPOs in recent history.
Despite the Faceplant pain (and a challenging environment), the team remained confident in the business’s ability to perform over the long-term and focused on the strategic benefits they would gain as a public company. After a somewhat stressful road show, it all worked out when the stock ultimately started trading. ServiceNow priced the IPO at $18 per share, opened trading at $23, and finished the day up over 30%.
I often say “it’s not about going public; it’s about being public.” As Luddy’s story shows, playing the long game is a mature approach and ultimately the most successful way to create long-term value for customers.
3) Extract as much value from the process as possible
Julia Hartz, the cofounder of Eventbrite, compares the amount of work that goes into an IPO process to the work that went into planning the wedding in “My Big Fat Greek Wedding.” Just like that event, the journey to IPO is expensive, filled with conflicting opinions, and extremely time-consuming.
Considering the amount of energy Hartz knew she had to dedicate to the IPO, she wanted to extract the most value out of the process as possible. So, when she put pen to paper on the S-1, she thought of it as a way to codify the Eventbrite story and define the mid-market for the first time. During the drafting process, she unearthed stories of event creators and used them to amplify the Eventbrite brand and illuminate these influential entrepreneurs’ journeys. When founders maintain a level of intention behind each step of the IPO process, they’ll be better at defining their company’s mission along the way.
4) Sometimes, a smart long-term decision means ignoring the market
Shortly after Ben Horowitz took LoudCloud public, he needed to raise $50 million quickly, while the business was burning cash even faster. To make matters worse, a large, thus-far reliable customer suddenly called to announce that they were bankrupt and would be leaving LoudCloud on the hook for $25 million, meaning Horowitz now actually needed to raise $75 million. This would be a frightening situation for any company, but since LoudCloud was a public company, he needed to update the market on these developments.
Predictably, the market wasn’t thrilled, and the stock plummeted. Facing an imminent bankruptcy of his own, Horowitz orchestrated a creative solution to sell the company’s services business and eliminate the major source of cash burn. This worked, but the stock had lost over 90% of its value by the time he completed the transaction. However, his conviction in the business paid off when he ultimately sold the company for over 40x that value.
At times, a public company’s management team has to ignore the market’s relentless short-term focus to favor necessary longer-term strategic decisions.
5) Going public can validate your business and provide transparency
Aneel Bhusri, CEO and cofounder of Workday and advisory partner at Greylock Partners, felt a massive sense of relief after Workday’s IPO. He also experienced a halo effect of the IPO that resulted in an array of new Workday customers, including those that may not have signed on before it was a public company.
After the IPO, Bhusri could target a new set of customers in traditionally risk-averse verticals like financial services that only wanted to bet on a company they knew they could trust for the long run. These prospective customers viewed the IPO as the necessary “stamp of approval” to engage with Workday. Being a public company enables businesses to provide greater transparency and insight into financial health, taking away previous risk factors and resulting in new customer buy in.
The massive milestone of the IPO is impactful for everyone involved, from your employee base and investors to your customers. While many companies today stay private later and longer, there’s significant value in taking a company public. However, there’s also no one-size-fits-all answer of whether or not to do so and when to do it. Management teams need to make sure that they have a validated, predictable business with a strong strategic vision, enough stability to withstand the scrutiny of public markets, and the resilience to face the inevitable difficulties of the IPO process and running a public company.
Frederic Kerrest is the COO and cofounder of Okta. You can listen to the full episode, “IPO,” wherever you get your podcasts. Tune into Zero to IPO every Tuesday, and check back here each week to read more about the insights on each episode.