Sunday, November 1, 2009

The pros and cons of going public vs. selling your company

I taught two classes at the Haas School of Business at Berkeley this week and the focus was on "Exits". One small class, one large, both were sets of students studying how to become entrepreneurs and start and run their own ventures.

Fortunately, having bought several companies, taken a company public, and sold my last company this was a subject I didn't have to do a lot of preparation for so I took a few minutes to tell my story (so far....) so they had the context on me and then I took questions.

Interestingly enough, the focus of the professor was on IPO vs. selling as exits, but I explained an IPO is not an exit for you as the CEO, only for your private company investors, because when you are CEO of a public company your mindset needs to be that you are in it for the long haul, for years, and exit is the last thing on your mind. It's call "Initial" for a reason, it's the beginning.

Here are the key points from the classes:

IPO (Initial Public Offering)

Pros:
- access to the capital markets (really the only good reason to do it)- if you need significant capital to grow this is usually a much more efficient (less dilutive) way to raise money than through the private markets like VCs
- cash in the bank to weather ups and downs
- liquidity for your investors - usually 180 days after the IPO when the lock up comes off
- liquidity for your employees - ditto
- better transparency and often higher confidence for your customers
- currency (your stock) with which to buy other companies and to build your business faster than you can organically
- you can build a new board of long term advisors instead of VCs, although some of the best VCs stay on the boards of their companies for the long haul (like Tench Coxe at nvidia and Bruce Dunlevie at Rambus)

Cons:
- you don't get liquidity yourself - as the CEO it's "bad form" to sell your stock any time soon after an IPO, some would say ever while you are CEO, because if you believe enough in your company to persuade other people to buy your stock, why would you be selling? (the only exceptions to this are for tax selling). Note I never sold a share of Simplex before it was bought by Cadence.
- transparency - there is no where, no way to ethically hide a bad quarter if you are public
- cost - estimated to be $5M a year in additional cost now post Sarbox
- time - you'll spend at least 1 week of every 12 talking to investors and preparing for your earnings call
- you have to spend a lot of time with investment bankers and lawyers
- you won't sleep much for 90 days

Selling your company

Pros:
- a way to accelerate your strategy if you chose the buyer wisely - you should get more investment and a better (larger) channel for your products - larger companies can scale a good fit very quickly as we saw with Cadence and the Simplex products and as Cisco demonstrated so well in the 1990s
- liquidity for you, your investors, your employees
- a way to declare victory
- a way out if you are reaching your limit - either your skill or your energy level without the risk of hiring a new CEO
- you are longer in the lonely position at the top - the one where the buck stops
- you don't have to deal with a board any more

Cons:
- absolute loss of control of your strategy and the investment in your strategy - make no mistake once you are sold, no matter what the buyer tells you on the way in, you are no longer calling the shots for your people and your products
- some of your employees will be let go - often finance and sales are let go because they are overlapping, maybe even R&D for overlapping products - this is heartbreaking because you've built the company together
- being bought is not a fun process, it's grueling
- you have to spend a lot of time with investment bankers (if you need them on the deal) and lawyers

Bottom line you shouldn't plan for your exit. The way to win is to set your sights on building a great, high growth company for the long term and make decisions to that end. Never make decisions because you are going to sell because you just don't know when the opportunity will come along and you'll make a weaker company as a result. Don't obsess on your percentage (as I have seen entrepreneurs do) - obsess on the size of company you are going to build and what it can be worth one day and have confidence that you'll do OK.

And when the opportunity to go public, or to sell your company, comes along think long and hard about the loss of control of your destiny, either way, and be sure you want it before you do it.

p.s. I LOVE that United now has Wifi in the air. I can be productive the whole way from SFO to NY.

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