Why ‘going public’ isn’t always the right choice
‘Going public’ can be seen as the golden achievement of a company, cited as the ideal exit strategy for its original owners. This is because many businesses are started with an intention to create wealth for stakeholders within a certain timeframe.
IPOs can make companies, and their owners, investors and employees rich, open doors for accelerated growth, and present new merger and acquisition opportunities. They can help to raise funds for corporate expansion, marketing and R&D, which can increase share valuation, reduce corporate debt and boost brand recognition.
However, going public may not be the right thing for everyone and should not be jumped on as the only win-all business model - it can be far from it.
The Drawbacks of IPOs
Drawbacks of going public are often overlooked in favour of the levels of capital and publicity that an IPO can promise. However, current market volatility and general economic risk aside, there are serious reasons why companies may want to stay private.
Going public can fundamentally change a business, and thereby its values and priorities. When founders release their ownership, most business decisions are then made to maximise shareholder profits, regardless of the long-term benefits to the company or their customers.
The company will quickly become more risk averse. For example, experiments and R&D decisions could be greatly scrutinised and could have severe consequences when it comes to market valuations and investor confidence. This had been particularly true in the biotech industry over the past year, with only five out of 102 biotech firms that listed last year now trading above their debut price.
Now a short-term strategy is often adopted, to meet targets set by stakeholders to increase revenue and pay dividends, rather than the original outlook.
It all comes down to whose interests you serve. Those who highly value customer experience, fair value, employee wellbeing or a positive company culture, may find an IPO objective clashes with these values and may be forced to change its long-term focus.
This business model and the impending economic crisis may see companies shifting into areas which could compromise customer experience, in an attempt to drive more revenue. Facebook, for example, apologised for selling private customer data to third-parties. “It was a breach of trust and I’m sorry we didn’t do more at the time,” wrote Facebook founder Mark Zuckerberg. It's precisely the sort of error companies make when trying to hike revenues to please shareholders.
How does staying private look in practice?
Zoho Corporation is one of the largest global bootstrapped SaaS companies and has decided to remain privately owned forever. This is especially rare in the business technology industry. Zoho can therefore afford to take its time to develop products, with no pressure to launch before it is ready just to meet stakeholder set targets.
In terms of privacy, our policy is ‘privacy by design' There's no pressure from activist investors to change this to boost revenues. Just look at the way Netflix has caved to investor pressure and adopted an ad-supported model. It annoys consumers, but it's the sort of sacrifice a listed companies need to make.
Talent and recruitment can be considered long-term when there are no short-term pressures. For example, Zoho’s head office in Chennai, India, houses Zoho Schools, an alternative outlet for higher education that offers students a stipend to attend, and has seen many take up jobs at Zoho upon completion. In fact, around 15% of Zoho's head office followed this route.
Zoho has been profitable every year since it was founded, today employs over 13,000 people, has offices in six continents, and serves 75 million users across more than 180 countries.
Household appliance technology company Dyson, construction and agricultural manufacturer JCB, self-assembly store IKEA, and supermarket chain Aldi, are all examples of other hugely successful organisations that have chosen to stay private.
An IPO is a payday for founders and original investors. But there can be a cost. It may not be fashionable to say so, but some tech companies can perform far better by staying private.