I was pleased to see LinkedIn file their S1 this past week. It’s a great example of a “back to basics IPO” in my opinion. It’s a strong and defensible business with lots more upside.
At the same time, I had a friend today comment about a conversation with a startup he is interested in working for. He heard another friend at the company (not a senior team member) mention that the company was poised for a public offering imminently.
It was actually the 4th time I had heard this about the company. It’s a message that seems to pervade the organisation. To be clear, it’s a company that is scaling nicely and is aggressive about pulling in top talent. From what I can gather, they use the potential for a public offering in the next 1-2 years as a marketing tactic to draw in strong employees.
But it seems a little misleading to me. I admire this company a fair bit, but I know for a fact that their numbers are no where close to IPO potential at the moment. Sadly, I think many folks just take this message at face value – after all, not that many mid-level engineers or salespeople have insight into what an IPO candidate looks like.
Here are a couple characteristics that I think one should look for as a reality check if they hear a company is on the verge of an IPO:
- Revenue > $100M. For some industries, the bar is much higher, but this is a rule of thumb. The costs of operating as a public company are over $2M (audit, D&O insurance, etc) so that alone is significant enough to make it irrational for a smaller scale company to go public. There are of course other reasons why revenue scale is important, but I won’t go into it now.
- Upside. Great public companies are attractive to investors because there are strong prospects for future growth. A lot of factors drive this: network effects and barriers to entry, underlying market growth, potential for international expansion, etc. The company also needs to demonstrate an understandable business model with the core metrics moving in the right direction. Ex: low and declining churn in a recurring revenue business. If this stuff isn’t figured out, the public offering will probably struggle.
There’s a lot more that goes into this (I’m on my iPhone so this was probably too ambitious of a post for this medium.) But the point is, the bar for being a successful public company is high, and it usually takes time to get there.
If you are recruiting, keep these in mind if you hear promises of great wealth in the event of an IPO. More important, don’t be lured into a company for this reason. Life is too short and businesses are too uncertain. Join a company because you believe in the product, market, and management and think you can make a meaningful and unique impact.
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