Cayenne Consulting

An IPO Is a Poor Exit Choice for Most Entrepreneurs

IPO Barchart

IPO Barchart

Many entrepreneurs still dream of “going public,” making billions of dollars, and playing with the big boys. They don’t realize that this option would likely be their worst nightmare, since it costs millions for the road show, usually dilutes your equity to a tiny fraction, and takes away all your entrepreneurial control.

Even though the Initial Public Offering (IPO) alternative for a successful startup seems to be coming back into vogue, it is still extremely rare. Only about a dozen U.S. companies made the IPO transition in 2009, out of thousands of startups. Even in most of these cases, the original startup founders were pushed out, or heavily supplemented, with “experienced” executives.

Sure, there are examples of founders who have survived and prospered, such as Bill Gates and Larry Page, but these guys are the exception, not the rule. More importantly, you should never even start down this path unless you can really use a large infusion of $150 million in cash or more, and have $3 million in the bank and up to 18 months to dedicate to the effort.

I recently reviewed a good summary of the advantages and disadvantages of an IPO exit strategy for startups in a widely-used textbook “Entrepreneurship,” by Robert Hisrich, Michael Peters, and Dean Shepherd. Their synopsis of the key risks should make you look hard for an alternate exit strategy:

On the other hand, if you are looking for major financing to expand manufacturing capacity, or need major marketing efforts to build your brand, an IPO may be the only way to get you there. Of course, IPO funds can be used to finance a big development effort, but the delay in payback will likely cause a quick stock price decline, which invokes the challenge of continuous growth mentioned above.

In any case, an entrepreneur in one who likes to build new products or services, and works ON their company, while a public business executive works IN the company. Once the new startup is “proven,” most entrepreneurs are happy to exit, before being forced out or burned out, to start again with a new and even bigger vision. Don’t be driven by greed to the wrong alternative.

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