Instead of Taking Millions More in Investor Money, Our 25-Person Company Chose to IPO
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Editor’s Note: In the new podcast Masters of Scale, LinkedIn co-founder and Greylock partner Reid Hoffman explores his philosophy on how to scale a business -- and at Entrepreneur.com, entrepreneurs are responding with their own ideas and experiences on our hub.This week, we’re discussing Hoffman’s theory: You need to raise more money than you think you need -- and potentially a lot more. Listen to this week's episode here.
When you’re trying to reinvent an entire industry, you can’t focus too much on how things are “normally” done. And the same philosophy should apply to your fundraising strategy.
There are a handful of fundamental truths in life. One being that moving sucks. I felt that pain six years ago when I was moving apartments. I was surprised that with all the technology at our fingertips, there was nothing to reduce the time it takes to plan and execute a move. So I created Updater to improve the relocation experience.
We’ve come a long way, but our platform has taken years to build and required tens of millions of dollars. In 2015, Updater became the smallest VC-backed American tech company -- at only 25 employees -- to ever IPO on a public market. Since then, the company’s value has increased by 400 percent, causing hundreds of entrepreneurs to ask me: Why did Updater decide to IPO, and are the public markets appropriate for my company?
As the CEO, I’ve never been committed to any specific funding path. Over the years, I had hundreds of meetings with all types of prospective investors, which resulted in a wide range of equity investments. From our seed funding with Australian angel investors, a Series A round with New York VCs, a strategic investment from a large trade association and a successful IPO, it’s been a wild, one-of-a-kind rollercoaster. And, like any thrill ride, it’s had its share of highs, lows and everything in between.
Many external observers, existing investors and, initially, even our employees, all found our IPO shocking. Fair enough -- no company as small as Updater had ever pulled one off. But, we made the strategic decision to pursue an IPO as a fundraising strategy, not as a liquidity event. This is where we really broke the mold. Startup founders often stay on the well-traveled VC path for funding. This makes sense for many entrepreneurs because VCs can add tremendous value -- both in terms of their experience optimizing high-growth companies and their credibility. But, too often alternative funding paths are overlooked.
Before we IPOed, I applied the same process I used for every fundraising event: I analyzed the “pros” and “cons” of all opportunities across five key factors. All signs pointed to an IPO, not further VC funding, which even took me by surprise.
The five factors:
Positioning: What impact will the investors have on our future fundraising, growth or exit strategies?
Control: What rights and powers will be granted to the investors in exchange for the capital?
Value: What do the investors bring to the table (in addition to the capital) that will help our business succeed?
Dilution: What percentage ownership will we sell in exchange for the capital?
Responsibilities: What obligations, costs and risks are associated with the investors, both upfront and after we receive the capital?
VCs tend to look for certain patterns and thresholds for each subsequent round of funding. If a company doesn’t fit nicely in their mold, funding can be difficult. Before we IPOed, many VCs suggested that we should shift focus to growing revenue, but the business I envisioned needed at least one more year of focusing solely on expanding national market penetration. The diverging views indicated to me that if we stayed on the VC path and then needed more capital in the future, the terms would be unfavorable.
I also wanted flexibility -- access to large amounts of future capital to opportunistically accelerate market penetration if possible. I wasn’t optimistic that such flexibility was in the cards if we continued fundraising with VCs.
The writing was on the wall that the VC path was no longer an ideal fit. Most entrepreneurs in this situation stay on the path regardless -- and the results are sometimes devastating.
The search for new growth capital and increased flexibility led me to the public markets. Wall Street? Nope. I did what many pioneering Americans have done in the search for new opportunity. I went west. Way west . . . across the Pacific . . . to Collins Street in Melbourne and Martin Place in Sydney. Behold, the Australian Securities Exchange (ASX).
Our lead seed investor from Australia suggested that we look at the Australian public markets. But why the ASX? Updater was too small for a NASDAQ listing and, as it turns out, the ASX is optimized for earlier stage growth companies. The ASX is also optimized for fundraising. It ranks in the top five major global exchanges for raising capital, and the ASX enables simple “on-market placements” for additional fundraising after listing. If we delivered on our key metrics and maintained supportive shareholders, it could be much easier to raise additional capital on the ASX to accelerate growth, as compared to staying private.
Prior to our IPO, Updater’s Series A round was led by top tier U.S. VC firms, including SoftBank Capital, IA Ventures and Commerce Ventures, and we received a strategic investment from the National Association of Realtors, bringing together some of the brightest and most influential voices in the industry to help grow our business. Because we already had the strategic "value-add" investors that we needed, we were free to welcome leading institutional investors, as well as retail investors who had never invested in a U.S. technology company.
In exchange for capital, VCs generally require a class of “preferred stock” with numerous special rights and privileges. Raising money on the public markets, on the other hand, involves issuing shares of “common stock” in exchange for the capital, as well as converting all preferred stock to common stock. The ASX listing resulted in our executive team maintaining control over future strategy and decisions, as all shareholders had the same class of stock.
2016 looked to be a very promising year for Updater, and I believed that if we performed well, our share price would increase. We could then have the option of raising additional capital at a higher valuation, minimizing dilution. I’ve spoken with many other CEOs who expressed remorse that they gave away too much ownership early on, an outcome I sought to avoid.
Going public is synonymous with increased financial and operational responsibilities. Traditional burdens of an IPO include subjecting the company to new processes and regulations (such as ongoing audits and disclosures) and the distractions of ongoing investor relations.
However, these added responsibilities weren’t as burdensome for our team as one might expect. It was always our goal to emerge as a public company -- a national leader in the relocation industry. Therefore, we viewed the ASX IPO as merely taking on these responsibilities a few years earlier than anticipated. We were pleasantly surprised to learn that the upfront costs and ongoing expenses of an IPO on the ASX were not as steep as on NASDAQ. Additionally, our management team was uniquely qualified to successfully manage the IPO process. For example, before Updater, I was a corporate attorney at Cravath, Swaine & Moore LLP.
To me, the biggest risk of tapping the public markets is that, as compared to private investors, the markets are often less sympathetic if a company under-delivers on expectations. Disappointing the market can be a punishing experience.
Despite conventional wisdom to the contrary, I was confident that the public markets would support a strong growth story (without an initial focus on monetization), so long as the market understands the value of the company’s growth metric and the company can accurately forecast it.
We were fortunate that our new IPO investors (about 15 investment funds) understood our growth story and were aligned with our strategy. The importance of this fact cannot be understated. Without it, an IPO would not have been feasible -- the risks would have been too great. We also won the support of one of Australia’s leading real estate tech executives (and he later joined our board of directors); his endorsement helped build trust and respect for our company.
Prior to the IPO, Updater spent five years building relationships and an innovative technology infrastructure. We had just begun to scale. At the time, we were processing nearly 2 percent of all household moves in the U.S., and we were confident that we could accurately forecast our growth to 5 percent within 12 months of listing.
Was it worth it?
By any metric, Updater’s listing on the ASX has been a success. Since listing, we exceeded our performance targets, growing national market penetration from 2 percent to nearly 10 percent. Our stock price responded well -- the value of our company has increased 400 percent since listing, making Updater one of the best performing tech IPOs in recent years. After listing, we did in fact raise an additional $30 million to accelerate growth, at a materially higher valuation, from leading global firms including Fidelity International. Our hypothesis on positioning our company to further accelerate growth via the IPO proved accurate. Since listing, we more than doubled the size of our team, moved into a larger office four times the size of our original space, onboarded hundreds of new partners and made great investments in our technology. We likely wouldn’t be where we are today had we not listed.
Personally, the IPO process was at times painful, but always exciting. During that time, I essentially became nocturnal to work around the clock on Australian hours. The workload of running a company and an IPO was extreme. And, as a first time public company CEO, I had a lot to learn, from managing relationships with investment banks to the expectations of hundreds of shareholders. I’ll never forget ringing the bell at the stock exchange on the morning of our IPO -- it was one of the most exciting and rewarding moments of my life.
Take off your funding blinders.
As with any journey, there are multiple pathways to success. I recommend that CEOs take an objective approach. Consider all possible paths to help ensure that you choose the best option for your unique business needs.
Other CEOs often ask me if they should look at the public markets. Usually after quickly analyzing the five factors, it becomes clear that, for their company, the “cons” will outweigh the “pros.” It’s unlikely that Updater’s unique dynamics will exist at other companies.However, other companies will have their own set of unique opportunities -- those shouldn’t be overlooked in favor of settling for the traditional path. Let a fair analysis of the five factors be your guide, no matter where the journey takes you.