It used to be that every startup’s dream was to go public one day. But the tide has turned in recent years, said Jeff Jordan, a partner at esteemed venture capital firm Andreessen Horowitz, at the Tech in Asia Tokyo 2016 conference.
“Now it’s been fashionable not to go public and companies are trying to stay private for much longer,” he told the audience. Jeff took his company, OpenTable, public in 2009 and he sits on the board of several listed firms so he has insights to share.
Jeff has observed the trend particularly in the US, where he said a lot of the companies remain private for a decade or so. That’s largely due to the emergence of non-traditional investors such as private equity funds, hedge funds, and strategic corporations willing to make late-stage investments, he said.
Still, if you’re a funded company, chances are you’re going to have to list or sell your business to provide liquidity to your investors. When you come to this crossroad, Jeff believes the decision ultimately depends on your goal.
“The reality is the best tech companies – the ones changing the world and building enduring brands – are public. You kind of have to go public if that’s what you want as an entrepreneur.”
Going public allows you to control your own destiny as opposed to getting acquired and handing the steering wheel over to the new owners.
He cited the case of PayPal and eBay – both of which he led at some point. “PayPal sold to eBay in 2002 and it was a great model. They sold for a billion and a half dollars but now it’s worth US$40 billion after it spun out of eBay. The PayPal guys had the chance to build an iconic business and they sold early.”
It’s the same story for Instagram, which was bought by Facebook in 2012. Had the founders sold it later or listed it on the stock market, they would have reaped a bigger return.
“People were amazed it sold for a billion dollars. It’s probably worth US$50 billion now and kudos to Facebook for buying.”
In the US, Jeff said mergers and acquisitions have been few and far between in the last half decade. Late-stage VC funding has drove valuations so high up that ideal acquirers – who are typically traditional public companies – can’t afford them.
“But some of the late-stage valuations have been re-calibrated and we’re seeing much more interest among the strategic incumbents acquiring innovation to help them figure out how to grow.”
Keeping on your toes
While staying private has its appeal – you avoid scrutiny, you’re not beholden to regulatory requirements, and you feel no pressure from fluctuating stock prices – Jeff laid out a case for going public.
“It makes you a better company because to be a public company, you need to have a strong team, you need discipline, you need great processes.”
It also gives you “continued access to capital,” he said, noting that a founder building a lasting company should never view an IPO as a “liquidation” event, but a “liquidity” one.
If the capital markets fall apart, the best defense is to make money. “Once you make money, you don’t need outside capital again [..] you’ve completely insulated yourself against capital market risks,” Jeff explained.
“I’ve been in Silicon Valley for about two decades and I’ve lived through three capital market cycles already – two of them were catastrophic and we could not raise as a startup for years,” he recalled.
“Ideally, again, if you make money, you control your own destiny. You can wait out timings and cycles.”
Steep valuation a hurdle
Jeff also offered some advice on tapping VC funding. He urged founders to take money when it’s available and take a little more than planned for more flexibility and runway.
The biggest mistake people make when raising funds, he said, is to reach for a valuation that’s too high.
“We’ve seen a lot of companies that have optimized for valuation and struggling to to clear that hurdle for the next round of funding. Don’t set up an impossibly high hurdle. If you set a crazy valuation, bad things can happen down the road.”
“You often don’t pick the best set of investors who are going to add the most value to the company if you just pick the highest mark,” he pointed out.