Thursday, September 23, 2010

To be or not to be … a public company

“Should I take my company public?” is a question I often encounter. More dreadfully: “We’re vending our (early stage) company into a public vehicle” (shudder!).

Many entrepreneurs are cognizant of the desire for exits or some other liquidity event amongst angels and other early stage investors. These entrepreneurs feel that being a public company serves the purpose of liquidity (for the investors) and raising big sums of capital (for the entrepreneur). For early stage companies, going public may or may not be a good idea for the entrepreneurs or for the investors.

When does it make sense to be a public company?

Strategic quality – The company has a clear strategic vision and the business plan to execute on that vision to make money. It has a demonstrable competitive advantage; and can sustain this competitive advantage into the future. The core business is capable of sustaining growth and shareholder value in the future. Its capital needs to meet its growth plans can best be satisfied by the public markets.

Operational quality – The company should enjoy growing demand for its products. It should demonstrate the ability to keep growing its market share. Its infrastructure and operational processes should be aligned with its strategic direction.

Reporting quality – The company must be able to predict and forecast based on good business planning. It must be credible in its message to financial audiences to ensure trading activity that warrants its corporate performance.

Receptive public markets – Are the markets ready for your company to go public?

Too often, entrepreneurs only consider the receptiveness of the public markets without paying enough attention to the strategic, operational and reporting qualities of their company. Without these qualities to sustain its share price, the newly public company quickly languishes on the markets and has great difficulties in raising additional capital.

I can count the number of happy endings to early stage companies who went public before achieving any significant milestones on a single hand – and considering the number of early stage companies that have gone public since the late 1980’s when I started keeping track … well, you can do the math.

Believe it or not, the angel investors I hang out with are in this business of angel investing because they really, really (!) want to help the entrepreneur’s business to succeed. The thrill of helping to build and grow truly great companies may actually supersede their other investment priorities. Going public makes sense only if the benefits to the entrepreneurs and the investors are sustainable.


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