Many technology startups, especially the best and brightest, are avoiding an IPO like a trip to the dentist.
Prominent young companies like Uber Technologies Inc. keep finding rich investors to help them delay a debut on the public markets. Among tech companies that sold public stock for the first time in 2016, the median time from their founding to an IPO was 10 years, according to research by University of Florida professor Jay Ritter. During the dot-com peak in 1999, it was four years.
And then there's Snapchat parent company Snap Inc., the Bizarro World tech startup when it comes to IPO timing. If Snapchat goes public in the next couple of months as expected, it will be about six years from its founding.
It's a Silicon Valley mystery why Snapchat is bucking the trend and going public before it has to. In addition to the peer pressure of IPO avoidance, going public also seems out of character for a company that revels in secrecy. If Snapchat needs more money to expand, it could no doubt continue to sell stock privately more easily than it can through an IPO.
Whatever the motivation for CEO Evan Spiegel and his team, Snapchat's choice to take a different approach than the typical IPO-avoiding startup could prove to be a genius decision.
First, as a high-profile internet company hitting a stock market starved for new public companies, Snapchat becomes the hottest Christmas gift for investors who haven't had many new toys. That gives Snapchat the power to set all the rules.
In a highly unusual move, the company appears to be bringing in a new set of public stockholders without giving them any voting power. And if it wants to, Snapchat can also use its status as a rare IPO breed to be parsimonious about financial information.
You might call this the Amazon.com Inc. model of being a public company. Amazon doesn't disclose how many Prime members it has, how many Kindles it has sold, and it gives pretty useless financial guidance, like telling investors its operating profit will be somewhere between zero and $1.2 billion. Amazon is a public company without the unpleasantness of catering to its owners.
It's easy to imagine Snapchat treading the same path. If Snapchat were to go public around the same time, or after, its "unicorn" peers such as Uber and Airbnb Inc., it would not have the same leverage over public investors.
Second, Snapchat may find being public is a healthy dose of vegetables for a still young and immature company. It's not a popular opinion in Silicon Valley, but in the long run public companies will have more access to cash and more confidence from customers and employees. And they benefit from the institutional rigors needed to be a public company. In tech land, where "fake it until you make it" sometimes bleeds into financial fudging or outright fraud, it's not a bad thing if the CEO risks prison for the same behavior tolerated from startups.
Some executives of tech companies that have held IPOs in recent years say they’re glad they did so even though some of their peers that avoided going public raised money more easily and soared in valuation without the headaches of accountability to public stockholders.
Perhaps not coincidentally, Bill Gurley, whose investment firm was an early Snapchat backer, is one of the most vocal Silicon Valley critics of startups' tendency to stay inside the private-market cocoon. "Many founders have been erroneously advised that IPOs are bad things and that the way to success is to 'stay private longer,' " Gurley wrote last year in a widely discussed blog post. "Not only is an IPO better for your company ... but an IPO is the best way to ensure the long-term value of your (and your employees’) shares."
The conspiracy theory explanation is Snapchat is going public while its digital advertising business is still young and all the promise lies ahead. The year Facebook went public in 2012, the company had $5.1 billion in revenue. Snapchat is expected to generate $940 million in ad revenue this year, according to eMarketer Inc. forecasts. The company is small enough that revenue growth is inevitable, and that's the best pitch it can make to IPO investors.
There are plenty of people in the technology world who take the opposite view of Gurley. Being a public company is out of vogue right now in Silicon Valley and beyond. But many richly valued startups are engaging in all sorts of financial gymnastics to stay private. My message tends to be: Just. Go. Public. It is cleaner and simpler, and Snapchat may emerge from its early trip to the IPO dentist with a mouth full of shiny white teeth.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
I realize there is the risk of self-justification in asking public companies whether they're happy they went public.
Gurley's views are at odds with the approach of Uber, another one of Benchmarks' investments. Perhaps Uber is an exception to Gurley's advice to startups to go public, or his views haven't influenced the company.
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Shira Ovide in New York at firstname.lastname@example.org
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