Timing is Everything
Posted by Trevor on 9 April 2012 | Post a Comment
Taking a company public can be an enticing way for entrepreneurs to make quick financial gains. It lowers individual risk and raises capital fast. This is one of the reasons The National Venture Capital Association is currently lobbying the US Senate to pass a bill that will make it easier for small companies to issue an initial public offering. Eligible start-up companies would be given relief from U.S Securities and Exchange Commission provisions for up to five years, making an IPO more affordable. But, as tempting as it might be for companies to cash-in on an IPO as fast as they can, it could mean problems for companies that issue too soon.
I worked with a company that discovered, the hard way, the pitfalls of an early public offering. By the time we learned our mistake, we were unable to take the company private again. An IPO is not a bell that can be un-rung. Like the majority of start-ups our company was the brainchild of an inventor. The culture was focused on creating ideas that would make a difference in people’s lives. The day the company released its IPO, its focus changed from a customer focus to satisfying the needs of shareholders. Investors in shares care about the share price and little else. Revenue and profit drive the share price, and the inventor’s ideas became secondary to those of marketing. There is nothing wrong with that, but in a company’s early stage the outside pressure can lead to a shorter-term vision. When the time came to invest profits into expanding the pipeline, the company was unable to make the decision without impacting the share price negatively. The company was no longer what it wanted to be at the out-set, its whole purpose changed.
I can understand the lure of an IPO for a new entrepreneur. The first two years of building a new company is tough and it’s easy to ask yourself “why am I doing this?” But sacrificing the longer-term vision for short-term cash infusion can take the direction of a company out of the founder’s hands.