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Unprofitable companies are the only ones that really benefit from IPOs. An IPO is basically a way for the company to raise money, but tis time straight from th

Unprofitable companies are the only ones that really benefit from IPOs. An IPO is basically a way for the company to raise money, but tis time straight from the public. Usually when it gets harder and harder for them to attract private investors. The IPO listing basically guarantees that they won't take the public's billions and run. Successful companies with perfect cash flows (think of Github, Valve, IKEA) always try to remain private. Because they have nothing to gain by raising more money. They can give their employees good bonuses and maintain control of the company. This is by design. In Silicon Valley we are obsessed with them because they are the only meaningful exit for common employees (take the money and run mentality). The rest of the world doesn't care much because they see them for what they are. Of course. Startup employees do not know they can sell their 'private' stock already, today. However, they need permissions to do so from the company's board (their answer will be NO. Here, saved you from asking. Or maybe they will offer to buy back the stock with shitty terms), and can only sell them to an accredited investor and not random people/public. Many companies would be ran better if they remained private (think of Facebook, which now has investor pressure to increase the price, which results in careless decisions about data handling, privacy etc).

duxup 7y ago
I'm not really sure about that. Just like taking investor money at anytime it can be a way to get extra cash to continue to build the company quickly. The IPO system is wonky and there are bad examples but I don't think your rule makes sense.
draw_down 7y ago
Yeah, the employees are the greedy ones.
kgwgk 7y ago
Profitable companies may also want to raise money, to invest it in their profitable business opportunities and generate even more profits.
Duhck 7y ago
Needing to raise cash to operate or expand, and positive cashflow arent mutually exclusive ideas. A company can be profitable and still need more working capital to expand. That being said, I don't know what to make of Uber, Lyft and WeWork (future) IPO's yet, but I am highly skeptical
- hef19898 7y ago
  I assume an IPO is the easiest way foe private share holders to cash out. Then again, unless you are really asset heavy (manufacturing, etc..), I agree it might be a sign that less dumb money from the later rounds with dumber money. Or the company is burning cash faster than it is generated. Case in point, when you cash flow positive and idealy profitable even banks would happily finance your expansions. So unless as a company you want to be growing really fast, I don't see the added benefit of an IPO other than cash flow issues. Add too that the increased scrutiny by the authorities and I d prefer to be private. Of course the same argument could be made the other way round.
eigenvalue 7y ago
This is only true in general for tech companies because they tend to be "capital light"-- they don't require a lot of traditional capital assets such as factories and warehouses. Generally, the only tech companies which require a lot of capital are the ones that are burning cash and need to replenish their coffers. But IPOs can greatly help jump-start the growth of more traditional companies which are often constrained by lack of cash as they grow sales organically, even if they are quite profitable on a net income basis. This allows these companies to open new plants and stores and to hire people to develop new products. As much as tech increasingly dominates the economy, it's far from the only industry that matters.
- hayksaakian 7y ago
  Do IPOs usually generate new funding for the IPO company? IPOs seem serve as an `exit` for private investors who bought in while the company was private?
  - eigenvalue 7y ago
    They do both. It's relatively rare for a company to IPO without raising fresh capital for the company. There are however often "secondary" share sales where only "selling shareholders" (rather than the company) receive the proceeds.
    - deleted 7y ago
      [deleted]
    - usrusr 7y ago
      > It's relatively rare for a company to IPO without raising fresh capital for the company. An IPO without raising new capital would make it more difficult to answer what every buyer should ask: "why are they so eager to sell?" It's a variation of plausible deniability.
      - gmmeyer 7y ago
        It's what Spotify did, I think it's a decent question but it also allows for liquidity, especially since it's such a big part of comp it's not unreasonable to list
taytus 7y ago
I was reading your comment and nodding until this part: >think of Facebook, which now has investor pressure to increase the price, which results in careless decisions about data handling, privacy etc Trying to frame FB as a "bunch good kids under pressure" is a monumental mistake. Data has always been their business, selling ads and don't giving two shits about security is part of their DNA
radicaldreamer 7y ago
A lot of sweeping assumptions and generalizations going on in this one...
acjohnson55 7y ago
Facebook was extremely cavalier about data handling and privacy well before they were public.
hunter23 7y ago
This is incorrect. There are lots of cases where profitable companies want to IPO. Specifically the public markets are where you go when you need to raise money at significant levels. Nowadays this happens less often as their are bigger and bigger private investors (so you can raise billions in private markets). However there is still a point at which you may need to go public for fundraising. You are making a mistaken assumption that only unprofitable companies need to fundraise, there are lots of profitable companies that want to raise capital to fund future growth (and their current cash flows aren’t enough). Also I am very surprised that you named Github as a well run private company. As far I know, they were definitely not profitable (their spend was crazy) which is part of the reason the board took the acquisition offer from Microsoft. I really don’t think they are a good example of a well run private company. You are correct that only companies that want capital IPO but that is by definition as an IPO is a capital raise. I believe that direct listing is an exception to this.
- throwaway66666 7y ago
  You are correct. There are many cases where fundraising for successful companies is needed. From liquidity, to gathering funds to fuel new ventures. Acquiring competitors, etc. My assumption was that troubled ones also need it. So we should not be surprised that see so many controversial IPO listings recently.
- nradov 7y ago
  Back in the days before the first Internet boom, most major stock exchanges required a company to be profitable for several quarters before an IPO.
- pcl 7y ago
  > Nowadays this happens less often as there are bigger and bigger private investors (so you can raise billions in private markets) Arguably, the reason IPOs happen less now than 20 years ago is because of the increase in regulatory requirements (particularly in the US), and the increase in available funding is a result of that.
- maerF0x0 7y ago
  > raise money at significant levels. Define significant. I see softbank throwing billions at tech companies.
diminoten 7y ago
No offense, but of course IPOs benefit unprofitable companies. The entire point of an IPO is to raise capital to invest back into the company. Why would you ever have an IPO if you didn't have a plan for that cash, and why would you have an IPO if you had all the cash you needed?
- scarface74 7y ago
  Because the initial investors want to sell their ownership stake.
  - diminoten 7y ago
    That isn't a valid "business" reason, though.
    - scarface74 7y ago
      The investors own the business. Why would they be worried about the business and not just what is in their own best interest.
      - diminoten 7y ago
        They are, but what's in their best interest may be growing the company, not in cashing out immediately.
mojomark 7y ago
> Unprofitable I hear you, but... Meh, they say invest in companies who make products you use. I use the shit out of Uber and I don't plan on stopping even if the price goes up a bit. Now, I'm upper middle class, and I understand this isn't everyone's mindset, so I have no idea how the rest of the world feels. However, there are locatios, like my crappy hometown where I grew up not so fortunate circumstances, where hailing a cab simply wasn't an option. If you want to have fun at a bar, you're driving home drunk. Bottom line, I believe in this product and I only see it growing in importance - regardless of who is at the helm. That's my gut feel, and that's why I bought in a little today.
- zackbloom 7y ago
  Who says to invest in companies who's products you use? That does not seem like great advice. You should invest in companies who are undervalued by the market in your opinion, not just because you like the product but because you think they have a good business around it.
  - triangleman 7y ago
    I think Peter Lynch said that.
  - smallbigfish 7y ago
    First rule is: invest in something you understand.
  - baby 7y ago
    Uber is definitely undervalued on HN. They have so much more markets to enter.
    - AnimalMuppet 7y ago
      If your business loses money on each transaction, entering more markets isn't going to save you...
      - 7y ago
kortilla 7y ago
>think of Facebook, which now has investor pressure to increase the price, which results in careless decisions about data handling, privacy etc This doesn’t follow at all. Zuck still has control and they were careless before being public. I would suggest being public is the only thing that puts them in the spotlight for their shitty practices.
jorblumesea 7y ago
Do you really think FB's problems are because of public investors? Zuck has never cared about user privacy. On the contrary, he has always display a "privacy is dead" mentality.
- 908087 7y ago
  > On the contrary, he has always display a "privacy is dead" mentality. Except for when it came to his own privacy, which he spent tens of millions of dollars protecting.
kayoone 7y ago
It's not that black and white. A lot of profitable companies IPO to fuel aggressive expansion in new markets which would otherwise not be possible and could harm them in the future. Google was profitable when they IPOd https://www.sec.gov/Archives/edgar/data/1288776/000119312504143377/d424b4.htm#toc59330_11 https://www.sec.gov/Archives/edgar/data/1288776/000119312504...
acchow 7y ago
False. Silicon Valley is obsessed with them because it's the only place where hundreds or thousands of employees are given significant equity; many of them have $100k - $1 million in vested equity 1-3 years into the job. You don't want that frozen in a private company indefinitely. You want liquidity to use it and to diversify your holdings. This doesn't mean you think the company will fail and you just want to "take the money and run".
moorhosj 7y ago
One only needs to look at Levi’s IPO in March to prove this theory wrong.
rudolph9 7y ago
Facebook voting rights are in the hands of their dear-leader and no amount of investor pressure has direct impact on the decisions made by the company. > This is because of Facebook's dual-class share structure. Class B shares have 10 times the voting power of class A shares, and it just so happens that Zuckerberg owns more than 75% of class B stock. It means he has more than half of the voting power at Facebook. https://www.businessinsider.com/facebook-investors-will-vote-to-oust-mark-zuckerberg-as-chairman-2019-4 https://www.businessinsider.com/facebook-investors-will-vote...
- rudolph9 7y ago
  Maybe that logic applies to other companies but Facebook is probably a bad example.

duxup 7y ago

I'm not really sure about that. Just like taking investor money at anytime it can be a way to get extra cash to continue to build the company quickly. The IPO system is wonky and there are bad examples but I don't think your rule makes sense.

draw_down 7y ago

Yeah, the employees are the greedy ones.

kgwgk 7y ago

Profitable companies may also want to raise money, to invest it in their profitable business opportunities and generate even more profits.

Duhck 7y ago

Needing to raise cash to operate or expand, and positive cashflow arent mutually exclusive ideas. A company can be profitable and still need more working capital to expand. That being said, I don't know what to make of Uber, Lyft and WeWork (future) IPO's yet, but I am highly skeptical

hef19898 7y ago
I assume an IPO is the easiest way foe private share holders to cash out. Then again, unless you are really asset heavy (manufacturing, etc..), I agree it might be a sign that less dumb money from the later rounds with dumber money. Or the company is burning cash faster than it is generated. Case in point, when you cash flow positive and idealy profitable even banks would happily finance your expansions. So unless as a company you want to be growing really fast, I don't see the added benefit of an IPO other than cash flow issues. Add too that the increased scrutiny by the authorities and I d prefer to be private. Of course the same argument could be made the other way round.

eigenvalue 7y ago

This is only true in general for tech companies because they tend to be "capital light"-- they don't require a lot of traditional capital assets such as factories and warehouses. Generally, the only tech companies which require a lot of capital are the ones that are burning cash and need to replenish their coffers. But IPOs can greatly help jump-start the growth of more traditional companies which are often constrained by lack of cash as they grow sales organically, even if they are quite profitable on a net income basis. This allows these companies to open new plants and stores and to hire people to develop new products. As much as tech increasingly dominates the economy, it's far from the only industry that matters.

hayksaakian 7y ago
Do IPOs usually generate new funding for the IPO company? IPOs seem serve as an `exit` for private investors who bought in while the company was private?
- eigenvalue 7y ago
  They do both. It's relatively rare for a company to IPO without raising fresh capital for the company. There are however often "secondary" share sales where only "selling shareholders" (rather than the company) receive the proceeds.
  - deleted 7y ago
    [deleted]
  - usrusr 7y ago
    > It's relatively rare for a company to IPO without raising fresh capital for the company. An IPO without raising new capital would make it more difficult to answer what every buyer should ask: "why are they so eager to sell?" It's a variation of plausible deniability.
    - gmmeyer 7y ago
      It's what Spotify did, I think it's a decent question but it also allows for liquidity, especially since it's such a big part of comp it's not unreasonable to list

taytus 7y ago

I was reading your comment and nodding until this part: >think of Facebook, which now has investor pressure to increase the price, which results in careless decisions about data handling, privacy etc Trying to frame FB as a "bunch good kids under pressure" is a monumental mistake. Data has always been their business, selling ads and don't giving two shits about security is part of their DNA

radicaldreamer 7y ago

A lot of sweeping assumptions and generalizations going on in this one...

acjohnson55 7y ago

Facebook was extremely cavalier about data handling and privacy well before they were public.

hunter23 7y ago

This is incorrect. There are lots of cases where profitable companies want to IPO. Specifically the public markets are where you go when you need to raise money at significant levels. Nowadays this happens less often as their are bigger and bigger private investors (so you can raise billions in private markets). However there is still a point at which you may need to go public for fundraising. You are making a mistaken assumption that only unprofitable companies need to fundraise, there are lots of profitable companies that want to raise capital to fund future growth (and their current cash flows aren’t enough). Also I am very surprised that you named Github as a well run private company. As far I know, they were definitely not profitable (their spend was crazy) which is part of the reason the board took the acquisition offer from Microsoft. I really don’t think they are a good example of a well run private company. You are correct that only companies that want capital IPO but that is by definition as an IPO is a capital raise. I believe that direct listing is an exception to this.

throwaway66666 7y ago
You are correct. There are many cases where fundraising for successful companies is needed. From liquidity, to gathering funds to fuel new ventures. Acquiring competitors, etc. My assumption was that troubled ones also need it. So we should not be surprised that see so many controversial IPO listings recently.
nradov 7y ago
Back in the days before the first Internet boom, most major stock exchanges required a company to be profitable for several quarters before an IPO.
pcl 7y ago
> Nowadays this happens less often as there are bigger and bigger private investors (so you can raise billions in private markets) Arguably, the reason IPOs happen less now than 20 years ago is because of the increase in regulatory requirements (particularly in the US), and the increase in available funding is a result of that.
maerF0x0 7y ago
> raise money at significant levels. Define significant. I see softbank throwing billions at tech companies.

diminoten 7y ago

No offense, but of course IPOs benefit unprofitable companies. The entire point of an IPO is to raise capital to invest back into the company. Why would you ever have an IPO if you didn't have a plan for that cash, and why would you have an IPO if you had all the cash you needed?

scarface74 7y ago
Because the initial investors want to sell their ownership stake.
- diminoten 7y ago
  That isn't a valid "business" reason, though.
  - scarface74 7y ago
    The investors own the business. Why would they be worried about the business and not just what is in their own best interest.
    - diminoten 7y ago
      They are, but what's in their best interest may be growing the company, not in cashing out immediately.

mojomark 7y ago

> Unprofitable I hear you, but... Meh, they say invest in companies who make products you use. I use the shit out of Uber and I don't plan on stopping even if the price goes up a bit. Now, I'm upper middle class, and I understand this isn't everyone's mindset, so I have no idea how the rest of the world feels. However, there are locatios, like my crappy hometown where I grew up not so fortunate circumstances, where hailing a cab simply wasn't an option. If you want to have fun at a bar, you're driving home drunk. Bottom line, I believe in this product and I only see it growing in importance - regardless of who is at the helm. That's my gut feel, and that's why I bought in a little today.

zackbloom 7y ago
Who says to invest in companies who's products you use? That does not seem like great advice. You should invest in companies who are undervalued by the market in your opinion, not just because you like the product but because you think they have a good business around it.
- triangleman 7y ago
  I think Peter Lynch said that.
- smallbigfish 7y ago
  First rule is: invest in something you understand.
- baby 7y ago
  Uber is definitely undervalued on HN. They have so much more markets to enter.
  - AnimalMuppet 7y ago
    If your business loses money on each transaction, entering more markets isn't going to save you...
    - 7y ago

kortilla 7y ago

>think of Facebook, which now has investor pressure to increase the price, which results in careless decisions about data handling, privacy etc This doesn’t follow at all. Zuck still has control and they were careless before being public. I would suggest being public is the only thing that puts them in the spotlight for their shitty practices.

jorblumesea 7y ago

Do you really think FB's problems are because of public investors? Zuck has never cared about user privacy. On the contrary, he has always display a "privacy is dead" mentality.

908087 7y ago
> On the contrary, he has always display a "privacy is dead" mentality. Except for when it came to his own privacy, which he spent tens of millions of dollars protecting.

kayoone 7y ago

It's not that black and white. A lot of profitable companies IPO to fuel aggressive expansion in new markets which would otherwise not be possible and could harm them in the future. Google was profitable when they IPOd https://www.sec.gov/Archives/edgar/data/1288776/000119312504143377/d424b4.htm#toc59330_11 https://www.sec.gov/Archives/edgar/data/1288776/000119312504...

acchow 7y ago

False. Silicon Valley is obsessed with them because it's the only place where hundreds or thousands of employees are given significant equity; many of them have $100k - $1 million in vested equity 1-3 years into the job. You don't want that frozen in a private company indefinitely. You want liquidity to use it and to diversify your holdings. This doesn't mean you think the company will fail and you just want to "take the money and run".

moorhosj 7y ago

One only needs to look at Levi’s IPO in March to prove this theory wrong.

rudolph9 7y ago

Facebook voting rights are in the hands of their dear-leader and no amount of investor pressure has direct impact on the decisions made by the company. > This is because of Facebook's dual-class share structure. Class B shares have 10 times the voting power of class A shares, and it just so happens that Zuckerberg owns more than 75% of class B stock. It means he has more than half of the voting power at Facebook. https://www.businessinsider.com/facebook-investors-will-vote-to-oust-mark-zuckerberg-as-chairman-2019-4 https://www.businessinsider.com/facebook-investors-will-vote...

rudolph9 7y ago
Maybe that logic applies to other companies but Facebook is probably a bad example.