Before You Set a Goal to Go Public, Imagine Your Company Going Private

Before You Set a Goal to Go Public, Imagine Your Company Going Private

By Grow Wire contributor
4-minute read

In short:

  • Traditionally, “going public” via IPO is considered the trademark of a successful company. However, the trend of “going private” is picking up steam, changing the definition of long-term success.
  • A number of big-name brands have gone private in recent years, with more set to join them in 2020.
  • For founders, the phenomenon provides a lesson about preparing your business for all stages of its lifecycle.

We celebrate when companies go public. Ringing the NYSE bell is a once-in-a-lifetime occasion for successful entrepreneurs. It’s a place many reading this article aspire to be -- and for good reason. You put in years, maybe even decades, of work to reach the point where your company is valued enough to start taking on public investment.

There are plenty of good reasons to go public. If you’re growing fast (a great problem to have), you need capital to keep pace. If you’re carving out a new niche, you want to be the first mover so your name becomes synonymous with the space. That kind of marketing takes money. There’s prestige in being publicly traded. All said, there are more than enough good reasons to pursue an IPO.

But should you? Five or 10 years ago, that wasn’t a question most entrepreneurs would think to ask. But then, a funny thing happened on the way to hypergrowth.

There are plenty of good reasons to go public ... but SHOULD you?  

 In 2013, Michael Dell got tired of what he saw as undervaluation of his company’s stock — not to mention relentless pressure to perform to analyst expectations, prioritize short-term earnings over long-term investments and meet wildly expensive disclosure and compliance requirements.

The financial press went wild when Dell took his company private in a deal with a private equity firm. Little did anyone know that he was kicking off a trend. Since, Hilton, Panera and Heinz all have bid the public market adieu. Burger King did it twice, leaving the second time in 2014 after merging with Tim Horton’s in an $18 billion deal. In 2018, Elon Musk flirted with pulling Tesla private to escape the pesky rules that come with running a public company.

Ok, Musk might be a bad example. Tesla never went private, and Musk’s claims of planning to do so gave him a rough time with the press.

My point is, plenty of public companies have gone back to being private (and then gone back to being public again, as in the case of Dell -- but that’s another story). There is an unprecedented amount of private equity funding currently available and far fewer rules on that side of the fence. 

Plenty of public companies have gone back to being private. There is an unprecedented amount of private equity funding currently available and far fewer rules on that side of the fence.  

 As an example, Ultimate Software went private last year in an $11 billion deal. But unlike most public-to-private transactions, it didn’t face outside pressure from shareholders. The move had everything to do with the lifecycle of the company.

And this might be the most important point I want you to consider.

At Ultimate Software, growth had slowed. Not because it was unsuccessful -- far from it -- but because it had achieved high market share in its industry. At that point, you’re no longer considered an up-and-coming tech stock; you’re a mature company with different goals and a shallower trajectory. At some point of maturity, you start grasping for ways to appease investors and show upward movement rather than just running the best possible business.

Ultimate Software, which offers a tool for human resource management, went private last year.

Going private in 2020

As we start 2020, Instructure is the first public company to leave the public market and go private. In this case, it’s in a $2 billion deal with Thoma Bravo expected to close by the end of Q1. It’s an easy prediction this won’t be the last such move this year, or even this month.

After four years on the NYSE, Instructure had reached a similar place as Ultimate Software.

Its learning management system, Canvas, is now the industry standard, with over 30 million users. The company has deep partnerships with Microsoft, Amazon and other tech giants. And its stock price kept going up; at press time it was trading around $48 a share.

Instructure has a healthy market share, and the Thoma Bravo investment means it can focus on continued innovation and gaining new customers by delivering more features, rather than running on the quarterly analyst expectations treadmill.

Instructure is known for its learning management system, Canvas. The company is currently going private.

Pros and cons 

It’s important to note that there are disadvantages and advantages to both public and private investment. The type of company you have, your competition, your market share, your fixed costs, your risk aversion and your lifecycle stage all play a role in determining which route is best for raising funding. Being able to change course to another strategy when those factors change is key.

Going private comes with its own set of risks and pain points. The scrutiny of private investors is different from that of shareholders, but it’s still scrutiny. In either case, you will lose some control. The question is, how much? That’s why it is so important know your worth and identify the right partners when seeking private investors.

Fortunately, one thing entrepreneurs learn quickly is that there is no one, singular blueprint for success.

Going private comes with its own set of risks and pain points. ... Fortunately, there is no one, singular blueprint for success.  

 We’ll likely never see a public/private revolving door, through which companies come and go from the stock exchange like it’s no big deal. Going public costs a lot — of time, money and stress. It’s not a decision to make lightly and not a decision to back out of lightly either. Wall Street analysts have far-reaching memories.

Rather, I predict we will see tech companies, especially once they have achieved a solid market share, seriously considering the opportunity cost of staying the public course. There’s a reason we’re seeing a ton of spin-offs, for example, by companies — including public ones — with the moxie to take a leap.

As an entrepreneur, you should continually plan for all stages of success. I’m not saying to write off the dream of ringing that NYSE bell. I’m advising you to question what conventional wisdom or past ambition tells you is the “right” road. The companies that really make it, that last a long time, always analyze the path forward, assess risk and make smart, bold moves.

And that is a lesson you can take with you in every stage of growth and investment.

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