Not too long ago, every entrepreneur dreamed of taking his/her new business public and making it a multinational powerhouse. An IPO was seen as a foolproof method of raising capital from the market, while also offering great dividends and windfalls. However, things have changed a lot in recent years. Very few startups are going public today. Granted, some IPO deals may work for retail investors, but the odds of that happening are stacked against startups. A lot of entrepreneurs of this generation avoid this option like the plague.
Here are a few reasons why startups are becoming increasingly averse to the IPO route:
Public companies are under constant pressure
Public shareholders often are focused on short-term gains more than long-term development. They are happiest when there is a constant rise in the stock’s price, so they can sell their shares and earn a neat profit. This puts immense pressure on entrepreneurs and startups to increase current earnings, leaving little space for strategic investments. What’s more, public companies are always at risk for takeovers. Whether friendly or hostile, takeover attempts can give entrepreneurs at the helm of even the best public companies nightmares. This is often because the board of directors and the public stockholders are no longer focused on the founder’s vision of changing the world.
Increased risk exposure
Startups that take the IPO route are laid open to competitors and critics. Small businesses are typically run by a bunch of executives who are reluctant to disclose their operational financial details, decision-making criteria, and compensation formulas. However, when a startup goes public, it has to deal with thousands of shareholders – no small challenge. Also, public company employees and directors are at civil as well as criminal risk for misleading or false statements in the registration statement. In addition, employees are also at risk of getting caught doing insider trading.
Startup founders often don’t fit into a public company. Many founders aren’t excited at the prospect of communicating with analysts, keeping up with legal reporting requirements, and placating demanding stockholders. They are also keenly aware of their reduced authority in a public company, exacerbated by the need to maintain the right image and the right relationships, sometimes with people they don’t approve of.
An expensive affair
More and more startups are realizing that going down the IPO route is an expensive affair. Today’s entrepreneurs are aware that they have a lot to lose in the volatility of public markets. Several events that occur in the outside world can disrupt the goings-on of a public company, and this can get unsettling for the management that is at the helm of a startup. Business owners in this day and age like to have control over the things that eat into their returns. Since most people start businesses to enjoy the freedom that comes with entrepreneurship, an IPO isn’t necessarily a good idea.
For the longest time, the main reason for going public was that everybody else was doing it. However, owing to the recent era of awakening, a lot of startups are avoiding the IPO route.