Here’s something that might surprise you -- in 2014, only 62 tech companies went public. In the scheme of things, since there are thousands of startups in Silicon Valley alone, that seems like a fairly low number. Except that in 2015, that number dropped even lower to 28. And so far in 2016, there have only been two.
This waning tech IPO trend is a 180-degree turnaround from the previous hype around going public. Companies like Uber, which is a perfect IPO candidate with a valuation of $62.5 billion, are staying private. Major corporations like LinkedIn, Qlik, Marketo and SolarWinds are entering into partner agreements instead of continuing to operate on the stock market. Considering the current state of the investor market, should successful companies consider going public at all anymore?
To answer that, you need a good understanding of today’s tech investment environment.
How the IPO market has evolved.
One of the most pressing decisions the industry’s leading players face is no longer whether to go public, but rather what they should do with the massive piles of cash they’re sitting on. For instance, do they keep selling private shares to VC firms in order to remain private?
There are also investment options that fall in the grey area between public and private. Raising funds as a startup has been made even easier thanks to new crowdfunding rules that allow anyone to invest $2,000 or more in small companies for a stake in the business. With this process, companies can raise up to $1 million a year -- and virtually anyone can become a venture capitalist. This revamped investment tactic is valuable as startups that had raised so much cash via traditional VC funding are now struggling to validate their sky-high valuations and have become vulnerable to falling from grace.
Factors to consider before raising funds.
The reality is that going public is nothing like the get-rich-quick schemes that some people envision it to be. As the co-founder of a company that’s been around for over two decades, I’ve seen the rise and fall of the dotcom era, the surge and demise of some of the “unicorns,” and every phase in between. I’ve been frequently asked about my company’s plans to go public and my answer is: it’s not as straightforward as going public versus remaining private; it’s about doing what’s best for the company and thinking of the business’ long-term aspirations. Patience pays off, and slow and steady wins the race. While raising more capital or going public is a huge accomplishment, so is the ability to sustain steady growth and innovation. Here’s my advice to any startup on what they need to consider before raising funds or going for an IPO:
1. Make sure your idea truly fulfills a market need.
While assessing the market opportunity sounds like a no-brainer, this is one of the hardest things to get right. For example, so many companies have imitated the "Uber for X" model in virtually every service industry -- from grocery delivery and babysitting to laundry services -- but not all have been successful. Uber has done well because it services a high frequency need, and while its margins are razor thin, it's able to keep going because of the high volume of drivers and passengers it serves in multiple markets.
2. Think of investors beyond their checkbooks.
It's critical to work with the right investor that can help you shape and focus on growing the business. While taking an investment may seem like an attractive option, the funds should help to augment your startup, not distract you away from it. It's best to bring on a VC once the potential of your business is evident, and you've reached a level of growth and credibility in your market. This will help you pick the right partners for your business.
3. Don’t look at VC funding as the answer for growth.
I started Replicon in 1996 with my wife, Lakshmi, and it was only after 17 years that we decided to take on a Series A $20 million investment. We bootstrapped for many years and in the beginning, we would take cash advances from one credit card to pay the balance on the other cards to get our business off the ground. While I wouldn't want to relive that experience, a small budget forced us to be very disciplined and helped us develop the necessary skills to achieve long-term growth.
What’s in store for tech IPOs.
Despite the few tech IPOs that have occurred so far this year, the drought is expected to break. There are a number of companies considering an IPO -- Blue Coat Systems, Talend, Coupa Software and Twilio to name a few -- and there are certainly others who have confidentially registered. Acacia Communications, the second tech IPO of the year, performed very well on its first day of listing and Didi Chuxing, China’s version of Uber, is rumored to be considering an IPO in 2018.
Regardless of what side of the coin you’re on, there are pros and cons for any investment decision. In a market as competitive and volatile as technology, valuations fluctuate by the second and there is no one-size-fits-all approach. Deciding whether to go public or not is about evaluating what’s best for your company and its stakeholders in order to maintain and ultimately grow.