The transition of a startup to public form is fraught with some negative consequences

Original author: Marty Zwilling
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IPOIn the old days, every entrepreneur dreamed of making his startup public and making it a successful company. Today, the rate of transition of startups to public form (IPO - Initial Public Offering ) has left the dead zone, but still the pace is much lower than even half this value 15 years ago. Smart entrepreneurs are now trying to avoid publicity, due to the unpredictability and problems in the nature of the work of a public company.

According to a recent report by the audit and consulting company Ernst & Young, 2014 was a successful IPO year. However, they see danger in the fragility of the global economy and the high volatility of markets. Today, 70% of successful startups are bought by large players, which is in some way a safer and preferred way to grow and finance.

The reasons here are much more complicated than the collapse of key investment banks in the United States several years ago, so you should not expect a significant increase in the number of public companies in the near future, even despite the growth of the market. In my opinion, the main reasons why IPOs have lost their attractiveness for an entrepreneur and investment prospects are as follows:

  • The US IPO process is still confusing.
    Too many startups have experienced financial losses and technical failures in the IPO process. King Digital Entertainment and Facebook are just one of them, opposing individual investors and startup leaders. In addition, the most ordinary investors are convinced that insiders get the main margin with IPO.
  • Going public is an expensive process.
    As a rule, the costs of IPOs for startups today range from $ 250,000 to $ 1 million. In addition, a huge amount of administrative, and other key operational, accounting and communication resources are spent. The processes of mergers and acquisitions in comparison with this look very simple.
  • Constant pressure for profit growth.
    Ordinary shareholders usually only consider short-term prospects. Therefore, startups exist under tremendous pressure, striving to increase current income, and are not appetizing for strategic investments.
  • Startups made public are influenced by competitors and critics.
    Startup executives generally do not want to disclose “cards” in prospectuses and reports of the SEC (Securities and Exchange Commission). When dealing with thousands of shareholders, you often come across criticism, which in itself becomes a difficult test.
  • Compliance with Sarbanes-Oxley law is a heavy burden for the company.
    According to it, all public companies of any size must immediately comply with the SEC's requirements for full reporting. This does not help small public companies, which cannot be competitive in the processes of accounting, documentation and presentation of the necessary reporting.
  • Public companies are always at risk of takeover.
    Friendly or hostile takeover attempts are just two of the many ways in which founders can lose control of their own company. The board of directors, as well as the shareholders, are no longer part of a team focused on the vision of the founders of the startup.
  • Increased exposure to risk liabilities.
    Public company executives are at risk of civil and criminal penalties for lying or misleading statements. In addition, employees may face liability for misrepresentation in public communications and SEC reports. Managers can also be involved in insider trading and service rules for operating techniques.
  • Artificial market fluctuations tend to hit public companies in the first place.
    Private companies endure strong volatility much better than public ones. Shareholders of public companies are easier to emotion and prone to herd reflexes than real market conditions.
  • Founders do not fit into a public company.
    Most simply do not take advantage of all the capabilities of analysts that satisfy shareholder requests and have legal reporting requirements. They know that they can quickly cast aside those who do not support the right image and the right relationship with people they don’t like.
  • The image of large public companies is negative.
    In the past couple of decades, the image of the leader of a large multinational company such as Thomas Watson at IBM and Henry Ford has faded. Now, the mistakes of large companies such as Enron and BP have created a new image of public companies, greedy and not caring about anyone.

These negative aspects largely offset the potential advantages of an IPO: increase in startup capital, the possibility of a huge increase in equity, wider access to investors, a market for their shares, the ability to attract first-class specialists , and other potential opportunities of a public company.

Thus, most startups, not even mentioning an IPO, when applying for angel investments, most business angels will react negatively to mentioning an IPO. It’s best to reserve this opportunity for later, when you have a well-established business model, a large market share and substantial income.

More importantly, first make sure that you really want to abandon the entrepreneurial lifestyle in favor of the position of public representative of the company. I bet that Facebook's Mark Zuckerberg occasionally finds himself regretting, despite the fact that he began to cost $ 33 billion.

What is an IPO and why is it needed?

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