💰 To IPO or not to IPO, that is the question! 💰

By David Frankel, Managing Partner at Founder Collective and on the board and/or first check in @pillpack , @seatgeek , @olo , @coupang, and many more.

I’m currently in the unforeseen but very fortunate position of having near front row seats in multiple companies that are IPO candidates. The related discussions are equal parts thought-provoking and stressful. Some thoughts:

There are a plethora of late-stage financing instruments available today that can obviate the necessity of an IPO. So the relevant questions concern the team’s enthusiasm, the company’s financial strength, and market criteria.

🤝 Team Readiness

If the leadership team doesn’t want to go public, there’s little to discuss. I can’t imagine anything more destructive to value creation that trying to force an unwilling team to make a dramatic change in corporate governance.

If the CEO is not dreaming about ringing the NYSE bell or pushing the button on the NASDAQ floor, an IPO makes no sense. Before going too far down the IPO road, founders should conduct a thorough self-examination.

The key question is, “Do they want to grow this company for the next few decades of their life?” That is the primary reason to consider an IPO. IPOs are not liquidity events for founders.

I repeat:

🚨🚨🚨 IPOS ARE NOT LIQUIDITY EVENTS FOR FOUNDERS 🚨🚨🚨

If a founder’s primary goal is liquidity, a traditional M&A process is a better idea. IPOs are a tool that allow founders to play the long game. Rule 10b5–1 legally limits an executive’s ability to get rich quick, and the social signal of a founder cashing out cements it.

IPOs may be less ideal for most investors too. I’d strongly recommend listening to this interview with @bgurley to better understand how the IPO process is optimized for bankers at the expense of founders and funders.

Bill Gurley - All Things Business and Investing - [Invest Like the Best, EP.137]

Sequoia’s Mike Moritz offers an even more critical appraisal, “For stock offerings, investment banks occupy the same position in the investment universe as a scalper does in the theatre world.”

Investment banks are losing their grip on IPOs

Whether you choose an IPO or direct listing, being a public company CEO is a fundamentally different job. It requires tight management to ensure good news is delivered on a quarterly cadence, fluency in high finance, love for hard-charging sales, and appeasing cranky analysts.

A founder/CEO might be open to that, but is the team ready and available? Are the COO and CFO roles filled with folks who relish this and can go through the motions both before and after? Previous experience really does help here. If uncertainty reigns, pause.

💰 Financial Strength

The cost of preparing to file starts at millions. There are real jumps in expected salary costs to support a public company CFO as well as their staff. That’s just the start. If the company can’t view these costs as rounding errors, they’re not ready.

The business also needs to be well-functioning and instrumented. The CEO can’t be immersed in day-to-day operations. The IPO prep process is all-consuming and will draw huge gobs of attention from the senior team for at least a year ahead of the proposed offering.

Are the financials IPO-worthy? It seems like an obvious question, but if a startup can’t achieve a significant multiple over its last round, later-stage investors might not even be interested in entertaining the idea.

If the business is growing that fast, is it really wise to sacrifice the upside? If the company has tremendous growth opportunities in front of it and access to capital, pursuing those opportunities and re-evaluating the IPO opportunity later seems to be a better idea.

🌐 Macro Considerations

The IPO window was wide open post-Datadog, but WeWork slammed it shut. Now it seems fitting that all are doing the math with extra vigilance. Companies in hot verticals need to figure out if they want to be the ones to test conviction.

Still, bankers remain self-servingly seductive. IPO underwriters may be the best-educated, most smartly dressed used car salespeople you’ll ever meet. They’ll gloss over the flaws of your business and trumpet minor successes. It’s flattering but misleading.

There may be pressure from some shareholders to move aggressively. Sometimes they’ll be offering wise counsel, but it’s important to understand their motives. Liquidity from this IPO might be the key to their raising a new fund, or buying a yacht:

Jim Clark's Boat Is Smarter Than Yours Netscape's navigator likes the sea. He likes to write…

Even if the company gets out well (by their own definition), managing analysts during a downturn is no picnic, when all of the company’s financials are laid bare for the world (& their fiercest competitors) to see.

An IPO is considered by most founders to be a massive milestone. This perception makes them susceptible to accepting the friction, misinformation and under-pricing that serves Wall Street, not Main street (or even Sand Hill Road, SoHo, or Harvard Square.)

If it is a go on IPO, keep reminding yourself that you are far off “home turf” and question every “given” that you are given. Not to do so is unforgivable — it is misaligned with the thoughtfulness, tenacity, smarts, and courage that got you to this enviable moment.

And remember: Having *built the IPO-ready business* is the massive milestone. And that is what deserves the real celebration of the founders and the teams.