Time to Rethink the IPO

I opened up my news recently to see an article titled “The US IPO market has almost completely dried up.” This particular piece is in Business Insider, written by Bob Bryan. He goes on to say:

“Nobody wants to go public anymore.”

This is a travesty. There are investors seeking growth potential, and there are certainly growth firms that need capital to get to the next level in their growth cycle. So what’s wrong? Many people argue this is the aftermath of too much regulation and a skittish stock market.

I look at the problem also as a function of a strong fixation with the short term. Going public today, in a market that is perhaps more unpredictable than in the past, may lead to some interim unexpected results post IPO. But the IPO firm still gets money to grow, and if one considers the predictors of long-term survival and growth vs. short-term stock price peaks, then the decision to go public might just change. Using the funding from an IPO to drive innovation, secure an internal team that can propel growth and invest in the right leadership and partners will get a company a long way, and the sooner the firm starts and uses investment for these purposes, the better.

Research on long-term IPO performance

Why do I talk about long term vs. short term?  I have been doing multiple large-scale research studies on the predictors of performance post IPO, and we find that many of the factors predicting 3-year, 5-year, 10-year stock price growth and firm survival have zero to do with the IPO day financial statistics and more to do with non-financial factors. For example, in a study we just finished on the largest IPO cohort to date, the class of 1996, two things predicted 10-year survival, and the data that are significant were collected from surveys sent to the management team. What’s amazing is that anything in a survey would predict survival, and even more surprising is that many of the factors we think should predict long-term performance and that are tied to the short-term nature of our love for IPOs, do not play a role in helping the firm make it in the long run.

Long-term performance may not be important for investment bankers, people who flip the stock right away or venture capitalists, but it is critical for the growth of jobs and wealth, which are important for the bigger picture economy. So what does predict long-term survival? In this particular study, the key factors we found important were innovation and employee energy. Innovation drives survival (being in business 10 years later), while employee energy (having a culture with a high sense of urgency, employees being energized by their work) predicts what we call thriving, which is surviving and having a stock price at least at the going out IPO price.

The many paradoxes of short-term vs. longer-term performance

Over a series of studies we have found themes on what predicts IPO performance that would surprise many people.  Companies that place higher value on employees than other types of assets win in the long run; however, these companies take an initial negative hit on their going-out stock price. Why? It would appear that many people and firms investing in these companies see their strategic decisions to value employees as negative when compared to other assets that could be emphasized.  In addition, we have studied firms that are international at the IPO, that have women on their top team, those that keep their founder vs. exile the individual and a host of other factors not normally seen as part of the IPO work. When we go beyond examining the first day of IPO performance and consider how firms use the funding to grow their firms, there is much more to learn. By sharing this information and preparing firms considering IPOs, we can create a robust environment for not just IPO day but life as a public company.

Entrepreneuring journey

Entrepreneurship is much more than the start-up event, and it is even more than going public or similar exit events. Entrepreneurship is a journey; it’s a verb – I like to talk about entrepreneuring.  This is because we are in an era where larger, established firms also are involved in tapping into the entrepreneurial talent of their employees, investing in new businesses and helping nurture their growth and buying companies, spinning out firms and more.

The time to fixate on singular events is over. The learning and research that needs to be done should delve into how a firm can stay the course and grow – thus adding jobs, careers, innovation and wealth to the economy.

New IPO learning opportunity 

The Kauffman Foundation is teaming up with me and a group of business leaders and academics to help learn facts about IPOs that have not been shared to date.  Through a 2-day workshop participants will meet the leaders of the firms from 2016 who survived and who struggled. They also will meet CEOs thinking about taking their companies public and also learn from leaders of firms that are going the IPO route today. Learn from data that show what really drives success and meet the people who made it happen.  

November 2-3, 2016 at the Kauffman Conference Center in Kansas City, Missouri we will be hosting a once-in-a-lifetime event. In addition to the Kauffman Foundation, the work is being done with teams from the University of Nebraska-Lincoln and the Center for Effective Organizations at the University of Southern California.

To learn more, feel free to contact Theresa.

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Theresa M. Welbourne, PhD Will and Maggie Brooke Professor in Entrepreneurship and Executive Director, Alabama Entrepreneurship Institute, University of Alabama.