Leap of Faith
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Companies that go public reach a milestone few other businesses do, but that's only the beginning of a difficult journey. When Internet search engine Google announced its initial public stock offering was right around the corner, some heralded it as the second coming of the tech IPO market. But as has been widely reported, Google founders Larry Page and Sergey Brin weren't exactly eager to take the public plunge, worried it would transform the company's business culture and stifle its flexibility.
Legitimate concerns, to be sure. As any public entity can attest, making the leap from privately owned business to publicly held company can test an organization on many different levels. While an IPO offers undeniable benefits, including access to capital, liquidity and personal wealth for the owners, it also creates additional responsibilities for the company. To begin with, producing the requisite financial statements is expensive and time-consuming, especially in recent years with passage of the Sarbanes-Oxley Act. The new standards, aimed at placing more stringent controls on corporate accounting practices, are particularly burdensome for small public companies. What's more, the pressure for short-term performance results is immense.
And there's little patience for short-term setbacks, as Douglas G. Borror, chair and CEO of Dominion Homes, can confirm. After raising $25 million in an IPO in 1994, Borror, 49, had high hopes for the home-building company his father had founded in 1952. But seven interest rate hikes in a five-month period dampened demand for new homes, plunging the company's stock to $3 a share. "Our business slowed down, so we didn't hit the numbers we had hoped to hit in our IPO," says Borror, whose company builds single-family homes in central Ohio and Kentucky. "Our stock went to $5 and later sank as low as $3. There was about a four-year period where it never got above $6."
Because its share price took such a sustained hit, the $563 million company had to rule out using its stock as currency to acquire other companies, one of the things that makes an IPO attractive in the first place. "We realized that avenue of growth was not available," says Borror.
In many ways, though, it was more difficult for Borror to deal with his personal disappointment than with the Wall Street backlash and financial fallout. "Any good management team wants to hit the numbers, and anytime you don't, it's tough personally," Borror says. "Wall Street sees people not hit numbers every day, and they adjust them upward and downward. You have to learn not to take it personally."
Kintera had a much easier time adjusting to public life after staging a $40.25 million IPO in December 2003. And for good reason: The San Diego company, launched by Harry Gruber, 52; his brother Allen, 49; and Dennis Berman, 53, to help nonprofits use the Internet to raise money and reach their goals, was the top-performing IPO in the months after its public debut. "We knew we were doing the right thing and [that] it was going to be an exciting time," says Gruber, president and CEO. "But it's a big world, and to come out No. 1 was definitely a surprise."
Leveraging its strong financial position, the company was able to accomplish its main IPO objectives, which included greater market awareness and growth by acquisition. A third goal was doubling the size of its sales force to accelerate revenue growth, another area in which Kintera has made significant progress. "It's been exactly what we wanted," Gruber says of the public offering.
Since 1986, Gruber has started five other companies that have gone public. And while Kintera had just $8 million in revenue for 2003, creating the necessary buzz to go public wasn't as difficult as you might think. "It's a much more mature market," he says. "People know much better what they're looking for."
Gruber understands the importance of staying focused in the face of all the distractions thrown at a newly public company, such as fluctuations in the daily stock price and investor inquiries. "These things could detract from your business if you don't realize that's where the noise is, and your business is your employees, your customers and your technology."
In its own bid to ignore some of the noise of Wall Street, Google has announced it doesn't intend to project quarterly earnings. "A management team distracted by a series of short-term targets is as pointless as a dieter stepping on a scale every half-hour," the company writes in an open letter attached to its SEC filing. Nonetheless, investors' short-term expectations are bound to be high.