6 ms·

I don't understand what the advantage of companies going public is. If they are public don't they have to essentially "force" profits for their shareholders? Wo

by wapz 10y ago

I don't understand what the advantage of companies going public is. If they are public don't they have to essentially "force" profits for their shareholders? Wouldn't a company that has a sustainable income that doesn't want to grow be better off staying private where they can be "themselves?"

xapata 10y ago
Not exactly. There's benefit to staying private, but it's more about the time-value of money than the need to grow. Private companies can generally optimize for longer timeframes than public companies. Except for Amazon, whose shareholders seem cool with the idea of plowing all free cash flow into growth. Shareholders are often much more conservative than private owners and won't allow drastic changes. Private owners are more comfortable with variation. Growth is necessary for all companies, public or private. If you're not growing, you're dying. That's not always true, but it's true enough -- not just in economics, but for all organisms, literal and metaphorical. It's less about absolute growth than relative growth. If your competitor is growing faster, eventually they will crowd you out of the market.
- ClassyJacket 10y ago
  >Growth is necessary for all companies, public or private. Well, no. Only public ones have that pressure. If the owners of a private company agree, they can sit at any size and make a steady profit.
CobrastanJorji 10y ago
I'm no startup expert, but I imagine part of it is that the company's owners (founder, VCs, etc) would like to reap some rewards of their successful endeavor and diversify their riches into other businesses. That means finding buyers, which is presumably most easily accomplished by going public. It's great to build a billion dollar business, but it might as well not exist until you sell some of it to someone. I imagine that going public, simply by creating a lot of new shares, is also an effective way to raise additional capital, which could be used to grow the company more, similar to a private fundraising round but larger in scale.
- taneq 10y ago
  > It's great to build a billion dollar business, but it might as well not exist until you sell some of it to someone. This statement is boggling. Only in Silicon Valley can a "billion dollar business" be worthless except for the price of its shares. Anywhere else, "billion dollar business" implies some kind of actual revenue.
  - CobrastanJorji 10y ago
    A giant diamond is also worthless unless you can sell it to someone.
nodesocket 10y ago
Hoping others with intimate knowledge of investment banking and the market can also chime in, but here are my thoughts. 1.) Raise substantial additional capital for R&D, growth, new products, pay down debt, etc. 2.) Exit event. Allows founders, employees and pre-IPO investors to "cash out". Typically at nice fat returns since they get heavily discounted shares. 3.) Increased public awareness since IPO's usually have media coverage and a general frenzy.
- adventured 10y ago
  4) Use outsized market cap for acquisitions. Facebook for example picked up Instagram for a billion dollars, in large part (~70%) using its very lofty valuation/shares as exchange. Basically in net an incredibly cheap acquisition of an incredibly valuable property.
- thisnotmyacc 10y ago
  Not so much "heavily discounted shares" but "lower price to earnings valuations". PE ratio differences are how companies like Berkshire Hathaway use arbitrage to increase their value. They take the difference between a private entity's PE (2-4 X) vs public (17.94 in the case of the Berk beast) to increase the value of their stock. This is both Voodoo economics (how is $1 million a year profit worth $4 mil in one scenario, and $17.94 in another?) as well as somewhat logical, as public companies have more rules and transparency (in theory, if not always in practice) that make a profitable more public company more stable.
deepGem 10y ago
In my opinion, there are several advantages of a company going public. The foremost being accountability. I guess it's a bit psychological. Once you are public, inherently that feeling imposes some financial discipline on you as a founder/CEO. Then there are the mandated standards that force discipline upon you further. Next is the cheap availability of capital. Public money is one of the most economical ways of financing large sums of capital, on realistic terms. Third, you are not at the whims and fancies of a select group of investors. You can structure the company shares in ways that can either give you complete control or lets you keep strategic control while allowing you to de-risk your investor cohort. That being said, one of the most frustrating parts of being a public company is SoX compliance. This is not just for the CEO but for any executive/VP dealing with finances and sales. Every large sale takes a bit longer because now you have to have this additional layer of scrutiny. When you are used to silicon valley pace, these delays can frustrate you, but you eventually get used to it I guess.
- fixermark 10y ago
  That's valuable, but not necessarily to the owners. Witness Craigslist, which is extremely successful and still private; the owner doesn't see a need to grow or share the profits.
cft 10y ago
Founders can unload substantial part of their stock as long as they can keep the company afloat for a short period after the IPO (at least a year)
Mikeb85 10y ago
Private investors still want to get paid. Unless the company is 100% bootstrapped, which is almost never the case.
tedunangst 10y ago
Since Snap shares don't include any voting rights, the company isn't forced to do much of anything.
- Gustomaximus 10y ago
  I find this trend of holding voting shares separately a future issue. I know people should invest with their eyes open but this seems to be bending the rules to me. If your selling equity you should be selling right to influence and surprised its not an exchange rule forcing voting rights to ensure their companies dont become dynasties run by minority 'a-class' share holding family members out to milk the company...cough cough paint company that wont be named.
  - tedunangst 10y ago
    Yeah, much the same can be said for GOOG. It's like a weird variable rate (currently 0) bond of infinite duration, not a stock.
    - AstralStorm 10y ago
      Very similar to an index fund, except this one is indexed in stock of this company.
      - tedunangst 10y ago
        Huh, I hadn't thought of it quite that way before. Something to ponder. Most ETFs seem to just vote the default, but I think maybe some pass through proxies.
beagle3 10y ago
Beyond some size (some revenue, and/or more than 500 shareholders), even a private company essentially needs to make all the disclosures that a public company does; in which case, you have all the pains of a public company and non of the gains. Google went public when it did because it was effectively already public.
- pg314 10y ago
  > Beyond some size (some revenue, and/or more than 500 shareholders), even a private company essentially needs to make all the disclosures that a public company does;... I don't think that's true. Do you have some source that confirms this? If you go e.g. to Cargill's website (a $100 billion private company), you won't find any detailed financial information. There are some high level numbers and their yearly report is some marketing fluff. Same thing for e.g. Ikea. As a public company there is relentless pressure to deliver ever increasing quarterly profits above anything else. Trying to focus on anything else (e.g. sustainability or long term plans), opens you up to criticism and lawsuits from your stock holders.
  - idiot_stick 10y ago
    >Trying to focus on anything else (e.g. sustainability or long term plans) This is such a tired meme. Public companies do all kinds of long term planning. I love the fact that Silicon Valley thinks there's nothing better for the company than a young, maverick CEO, and that an experienced board and accountability are useless.
  - pathy 10y ago
    IKEA actually publishes a yearly report[1] that is close to what a public company would publish. But they don't have to. Regardless, the 500 shareholder thing specifically applies to American companies as far as I know. [2] [1] http://www.ikea.com/ms/en_US/pdf/yearly_summary/IKEA_Group_Yearly_Summary_2015.pdf http://www.ikea.com/ms/en_US/pdf/yearly_summary/IKEA_Group_Y... [2] http://www.investopedia.com/terms/5/500-shareholder-threshold.asp http://www.investopedia.com/terms/5/500-shareholder-threshol...

by wapz 10y ago

xapata 10y ago

Not exactly. There's benefit to staying private, but it's more about the time-value of money than the need to grow. Private companies can generally optimize for longer timeframes than public companies. Except for Amazon, whose shareholders seem cool with the idea of plowing all free cash flow into growth. Shareholders are often much more conservative than private owners and won't allow drastic changes. Private owners are more comfortable with variation. Growth is necessary for all companies, public or private. If you're not growing, you're dying. That's not always true, but it's true enough -- not just in economics, but for all organisms, literal and metaphorical. It's less about absolute growth than relative growth. If your competitor is growing faster, eventually they will crowd you out of the market.

ClassyJacket 10y ago
>Growth is necessary for all companies, public or private. Well, no. Only public ones have that pressure. If the owners of a private company agree, they can sit at any size and make a steady profit.

CobrastanJorji 10y ago

I'm no startup expert, but I imagine part of it is that the company's owners (founder, VCs, etc) would like to reap some rewards of their successful endeavor and diversify their riches into other businesses. That means finding buyers, which is presumably most easily accomplished by going public. It's great to build a billion dollar business, but it might as well not exist until you sell some of it to someone. I imagine that going public, simply by creating a lot of new shares, is also an effective way to raise additional capital, which could be used to grow the company more, similar to a private fundraising round but larger in scale.

taneq 10y ago
> It's great to build a billion dollar business, but it might as well not exist until you sell some of it to someone. This statement is boggling. Only in Silicon Valley can a "billion dollar business" be worthless except for the price of its shares. Anywhere else, "billion dollar business" implies some kind of actual revenue.
- CobrastanJorji 10y ago
  A giant diamond is also worthless unless you can sell it to someone.

nodesocket 10y ago

Hoping others with intimate knowledge of investment banking and the market can also chime in, but here are my thoughts. 1.) Raise substantial additional capital for R&D, growth, new products, pay down debt, etc. 2.) Exit event. Allows founders, employees and pre-IPO investors to "cash out". Typically at nice fat returns since they get heavily discounted shares. 3.) Increased public awareness since IPO's usually have media coverage and a general frenzy.

adventured 10y ago
4) Use outsized market cap for acquisitions. Facebook for example picked up Instagram for a billion dollars, in large part (~70%) using its very lofty valuation/shares as exchange. Basically in net an incredibly cheap acquisition of an incredibly valuable property.
thisnotmyacc 10y ago
Not so much "heavily discounted shares" but "lower price to earnings valuations". PE ratio differences are how companies like Berkshire Hathaway use arbitrage to increase their value. They take the difference between a private entity's PE (2-4 X) vs public (17.94 in the case of the Berk beast) to increase the value of their stock. This is both Voodoo economics (how is $1 million a year profit worth $4 mil in one scenario, and $17.94 in another?) as well as somewhat logical, as public companies have more rules and transparency (in theory, if not always in practice) that make a profitable more public company more stable.

deepGem 10y ago

In my opinion, there are several advantages of a company going public. The foremost being accountability. I guess it's a bit psychological. Once you are public, inherently that feeling imposes some financial discipline on you as a founder/CEO. Then there are the mandated standards that force discipline upon you further. Next is the cheap availability of capital. Public money is one of the most economical ways of financing large sums of capital, on realistic terms. Third, you are not at the whims and fancies of a select group of investors. You can structure the company shares in ways that can either give you complete control or lets you keep strategic control while allowing you to de-risk your investor cohort. That being said, one of the most frustrating parts of being a public company is SoX compliance. This is not just for the CEO but for any executive/VP dealing with finances and sales. Every large sale takes a bit longer because now you have to have this additional layer of scrutiny. When you are used to silicon valley pace, these delays can frustrate you, but you eventually get used to it I guess.

fixermark 10y ago
That's valuable, but not necessarily to the owners. Witness Craigslist, which is extremely successful and still private; the owner doesn't see a need to grow or share the profits.

cft 10y ago

Founders can unload substantial part of their stock as long as they can keep the company afloat for a short period after the IPO (at least a year)

Mikeb85 10y ago

Private investors still want to get paid. Unless the company is 100% bootstrapped, which is almost never the case.

tedunangst 10y ago

Since Snap shares don't include any voting rights, the company isn't forced to do much of anything.

Gustomaximus 10y ago
I find this trend of holding voting shares separately a future issue. I know people should invest with their eyes open but this seems to be bending the rules to me. If your selling equity you should be selling right to influence and surprised its not an exchange rule forcing voting rights to ensure their companies dont become dynasties run by minority 'a-class' share holding family members out to milk the company...cough cough paint company that wont be named.
- tedunangst 10y ago
  Yeah, much the same can be said for GOOG. It's like a weird variable rate (currently 0) bond of infinite duration, not a stock.
  - AstralStorm 10y ago
    Very similar to an index fund, except this one is indexed in stock of this company.
    - tedunangst 10y ago
      Huh, I hadn't thought of it quite that way before. Something to ponder. Most ETFs seem to just vote the default, but I think maybe some pass through proxies.

beagle3 10y ago

Beyond some size (some revenue, and/or more than 500 shareholders), even a private company essentially needs to make all the disclosures that a public company does; in which case, you have all the pains of a public company and non of the gains. Google went public when it did because it was effectively already public.

pg314 10y ago
> Beyond some size (some revenue, and/or more than 500 shareholders), even a private company essentially needs to make all the disclosures that a public company does;... I don't think that's true. Do you have some source that confirms this? If you go e.g. to Cargill's website (a $100 billion private company), you won't find any detailed financial information. There are some high level numbers and their yearly report is some marketing fluff. Same thing for e.g. Ikea. As a public company there is relentless pressure to deliver ever increasing quarterly profits above anything else. Trying to focus on anything else (e.g. sustainability or long term plans), opens you up to criticism and lawsuits from your stock holders.
- idiot_stick 10y ago
  >Trying to focus on anything else (e.g. sustainability or long term plans) This is such a tired meme. Public companies do all kinds of long term planning. I love the fact that Silicon Valley thinks there's nothing better for the company than a young, maverick CEO, and that an experienced board and accountability are useless.
- pathy 10y ago
  IKEA actually publishes a yearly report[1] that is close to what a public company would publish. But they don't have to. Regardless, the 500 shareholder thing specifically applies to American companies as far as I know. [2] [1] http://www.ikea.com/ms/en_US/pdf/yearly_summary/IKEA_Group_Yearly_Summary_2015.pdf http://www.ikea.com/ms/en_US/pdf/yearly_summary/IKEA_Group_Y... [2] http://www.investopedia.com/terms/5/500-shareholder-threshold.asp http://www.investopedia.com/terms/5/500-shareholder-threshol...