Your IPO May Be Your Last Day

If you are an entrepreneur with ambitions to take your business public, take heed: A good idea matters more than a good management team. But even the best idea may not save you. There's still a pretty good chance you won't be running the company when it does go public.

Among 106 initial public offerings in 2004, only eight companies changed their line of business between the company's launch and the offering, according to research by economists Stephen Kaplan of the University of Chicago, Berk Sensoy at the University of Southern California, and Per Stromberg at the Swedish Institute for Financial Research. But even though the businesses were often doing well, 52 company founders—49%—stepped down from the CEO position into a lesser role or left their companies prior to the IPO. Says Kaplan: "Once you have a successful product or service you need to have a good manager, but he or she doesn't have to be the founder."

Those results echo the findings of the researchers' earlier work. Looking at 50 venture capital-funded startups that went public during the 1990s, they discovered that 42% of the founders were no longer CEO at the IPO. The more assets, such as equipment and patents, the business started with, the greater the likelihood the founder would be replaced.

That research also showed nearly half the businesses cited expertise among management and employees as a key advantage at the business-plan stage, but just 16% still thought these were decisive factors by the time of the IPO. As the company developed, physical assets, customer service, and reputation were emphasized instead.

The lesson for entrepreneurs is clear: Every founder who decides to go public should be ready to give up the corner office.

By James Mehring

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