
A Rising Number of Startups Reckon They'll Never Go Public - petethomas
http://www.bloomberg.com/news/articles/2016-03-18/a-rising-number-of-startups-reckon-they-ll-never-go-public
======
akulbe
Why is this _the_ goal? Seriously.

Everything eventually goes to shit once a company goes public.

In the beginning, it was about some kickass product/service. The focus is on
making something good, offering a good service.

Once a company goes public, the all-consuming reason for existence changes.
Now it's no longer about the good product/service. It's only about increasing
value for shareholders.

This begets mergers and acquisitions, which begets mass layoffs. (Where CEO
gets more fat pockets than he had already, shareholders get a little more than
a pittance, and hundreds if not thousands of employees get the shaft.)

Why not bootstrap, and get money the old-fashioned way, by working your ass
off? You know, building something YOU control, and that you're not beholden to
shareholders for?

Build something to _last_ instead of looking for an exit?

I left my last job of 8.5 years, the longest I've ever been at any one job, to
go out on my own. Sure, it's a risk.

My employer was in the process of an acquisition, and it completed after I
left. Then articles said they were planning on laying off 10% of staff. It's
hit 20% now, and no end in sight.

~~~
hkmurakami
If you take VC money, your goal becomes the VC's goal.

VCs need a liquidity event to happen within the expiration of the fund that
they wrote the check from. IPOs are theoretically unbounded in terms of
availability.

~~~
akulbe
I would say this is all the more reason _not_ to take VC money, but bootstrap
on your own. Why give up control?

~~~
nemothekid
> _Why give up control?_

For access to capital. If you were an Uber/Lyft competitor, it becomes very
hard to compete with competitors who have near vast amounts of money to spend
on marketing and customer/driver acquisition. Both Sidecar and Hailocab (in
the US) lived this first hand.

Some (if not most) businesses cannot be bootstrapped. It took a while for
Google to become profitable, and who knows if the search product would have
been as good if they had to focus on generating revenue on day 1.

------
fahrradflucht
> Nasdaq Private Market surveyed 126 attendees, of which 32 percent were
> founders or chief executives

You ask 126 people at SXSW and then make that story out of it? I think that's
a little bit to much.

~~~
readams
And it's an organization that provides services to companies that don't go
public.

------
erdojo
VCs need an exit to get a return. If not an IPO, then an acquisition. Unless
of course the company becomes insanely profitable and can buy out their
investors at a nice multiple.

Silicon Valley may be good at multiples, but not so good at profitability.

Acquisitions by private companies aren't as common as public companies, and
the valuations aren't typically as high. So if everyone stays private, there
aren't as many opportunities for 10x+ exits. Which means there's less cash to
invest in high risk startups. VC's depend on the big winners to cover the
countless losers.

If startups bootstrap, then they need to make money early. Which means you
can't hire until you make money, but you can't make money unless you hire. So
ambitions are seriously limited in the first couple of years. As are salaries.
Not easy to attract great developers when you can't afford to pay them.

On the flip side, bootstrapping a company and focusing on building products
that people not only love but are willing to pay for is insanely satisfying.
There's also a lot of upside to working with a small team for many years
before scaling.

~~~
hkmurakami
>VCs need an exit to get a return. If not an IPO, then an acquisition. Unless
of course the company becomes insanely profitable and can buy out their
investors at a nice multiple.

In addition, the exit must occur within the maturity term of the VC's fund.

~~~
hamburglar
What happens at the maturity of the fund of the company is still chugging
along but hasn't had a liquidity event?

~~~
erdojo
By that time, unless the company got profitable early, they've raised multiple
rounds and the investors have a majority interest. Once they control the
board, it's over.

I read somewhere that Aaron Levie of Box.net only owns about 4% of his
company. Choice runs out when money does.

------
emcq
What is a fair compensation package for early hires if companies continue to
keep stocks private and less liquid?

~~~
phillc73
A decent salary, with leave benefits similar to a lot of other Western
countries (4-5 weeks annual leave, sick leave, parental leave)?

~~~
MC7447a
You do realize that in those other Western countries developers make far less
than in the US? Even in the richer Western European countries like Germany,
France, Netherlands, Sweden, etc, $50-$90k is pretty typical for 5yr+
experienced software engineers. Yes, that's total, not base, and before taxes
which are higher than in the US.

~~~
philjohn
Depends, my base is higher than that range, and there are other benefits to
working in the UK - stronger employment laws, free health service, excellent
public transport that sees real investment ... and of course the holidays.

Just looking at salary is comparing apples to oranges.

~~~
em500
I'm not just looking at salary, I'm saying that the perks that phillc73 was
asking for (4-5 weeks annual leave, sick leave, parental leave) do not come
cheap.

~~~
xiphias
4-5 weeks + sick leave is mandantory in all countries of EU actually (even in
countries of Eastern Europe)

~~~
em500
Not sure what the point of your reply is. I know lots of the EU perks are
mandated. That's one of the things that makes Europeans have less take home
pay than Americans (hence my comment "do not come cheap"). No value judgement
here, US and western Europe are all democracies so these are the manifest
choices of their citizens.

------
tryitnow
So, if I'm an LP in a VC firm how do I get my money back?

Clipping dividend coupons like a retiree? If I wanted to do that I'd invest in
dividend paying public companies and bonds.

I'm all ears, tell my why any sane LP would want to invest in VC right now.

Much of the so-called returns VC's have experienced have been paper returns
due to ever higher valuations placed on portfolio companies.

But then when those companies get widespread scrutiny (which all going public
really is) then you're luck to not lose more than 10%.

So I'm paying VC asset management and performance fees for the privilege of
losing money?

I'm unclear how this is sustainable.

I think this bubble has gone on for longer than the last one in part because
there are fewer public companies and less hard-nosed scrutiny of these
companies.

~~~
yuhong
I think automatic monthly dividends from VCs would probably not be a bad idea.

------
ChuckMcM
Ha, funny story. "Hi we're a private market company that will give your
employees liquidity if you'll let us, no need to go public with all those
regulations and everything!"

I get that this is what the secondary markets would _like_ after all a stock
market without pesky regulations is so much easier to make profits on if you
control the market, than one where you have things like "rule FD" and that
whole insider thing which everyone hates right?

Here is my prediction, the secondary market stuff will grow for the next 5
years. Once really significant sums are passing through it there will be a big
scandal that wouldn't have happened in a more regulated market and the
government will swoop in and regulate it in a similar way eliminating much, if
any advantage.

~~~
sjg007
I agree. I also expect to see secondary markets that raise equity via crowd
funding.

------
liquidise
I suspect i am going to echo a lot of the cynicism that has been surrounding
the high rollers startup coverage lately, but quite frankly... why would they
go public?

As far as i can see, the invented heave-ho of a demonstrably unprofitable
business into IPO is troubling. These businesses are not designed for profit,
but for [unsustainably costly] growth. Sure the IPO may earn the founders
millions, but is it worth the stress that comes along with it? Invariably
investors want to make money. Often times the IPO play feels like they are
earning their money by throwing the founders to the hungry masses.

How many companies have we seen repeat this pattern and suffer massive morale
hits? The (my company failed/i was asked to step down/i wish i still
controlled my company) blog posts paint a telling tale of what looks to me
like a failed experiment.

I've never exited for millions so maybe there is a sense of accomplishment i
am missing here, but count me out. I can't imagine an amount of money that
would justify feeling like what was once my weekend project has grown to
something beyond my control. That it has left me embattled with investors and
then a public funding round i feel like i can never satisfy.

I don't get the sense the zombie unicorns are fulfilling dreams. Instead, i
get the impression they are keeping people up at night.

~~~
kgwgk
A more cynical question: why do these companies exist at all? From the
wikipedia definition of business: "The goal is for sales to be more than
expenditures resulting in a profit."

Wasting other people's money until the end of time is not a sound business
model. If they are not designed for profit the design has to change at some
point in time, even if it this means morale hits and keeping people up at
night.

~~~
crispyambulance
VC investors know what they're getting into. Every investment is a gamble and
that's OK.

As for why these companies deign to exist at all, they're just like most
actual business: they make enough to keep going, perhaps some growth on the
horizon, people put food on the table, and build careers.

Not every venture has to end in an IPO and unending explosive growth, nor are
those that don't "failures".

If every funded company had to pay back every dime of VC investment upon
"failure", no one would take risks. That's the game and VC's are OK with it.

~~~
Animats
_" Not every venture has to end in an IPO and unending explosive growth, nor
are those that don't "failures"."_

The most likely outcome is what VCs call "zombies" \- companies that can cover
their operating costs, but can't pay back their investors. They're a headache
for VCs, because they won't die and require attention. YC seems to be designed
for force startups to fail fast, so they don't end up with a huge portfolio of
zombies.

------
Ologn
> no immediate plans to pursue the public markets to raise capital

Corporations raise capital by selling bonds, by reinvesting profits, by
getting money from VC's and through other means. That companies rely heavily
on public markets to raise money is a mythology promulgated by people like the
quoted Nasdaq employee. The percentage of capital raised by corporations that
has been done via initial or secondary offerings as opposed to other means has
been miniscule. That is not new either, it has been that way since the 1940s,
and even before that.

------
drawkbox
Employees and regular investors never get a chance to invest when companies
don't go public, it is unfortunate. However, it is very difficult and it can
destroy a company going public.

This situation has become another middle class driving down force going
private/acquisition over public IPO. The public markets have a key role in our
economy and wealth growth across the board, private equity and acquisitions
not as much.

------
anovikov
Why the worry? It is just that the private equity markets have developed well
enough to make IPOs unnecessary for the vast majority of even very successful
companies. Why IPO if billion (ok, at least centimillion) dollar VC rounds
became the norm?

Only the hugest successful startups may find private markets too constraining
in this environment.

~~~
scrabble
VC are not donating money. They are investing. In order for them to be
successful, there must be a return on their investment.

This means that either companies need to be acquired, or they need to go
public. If someone is investing a billion dollars, you'd want to be acquired
for 10+ billion in order to have been a good investment. I think this makes
IPO a more likely outcome at those investment levels.

------
saosebastiao
This has a lot less to do with VC preferences or entrepreneur preferences or
even market preferences and a lot more to do with Sarbox. Anyone who has
worked for a publicly traded company has run into some bullshit bureaucratic
requirement caused by Sadbox that makes no sense, whether they realize it or
not. It is pretty well established in economic research by now that Sarbox has
affected the capital environment away from IPOs and more towards VCs and
Private Equity.

My favorite CS analogy is the Global Interpreter Lock. It had good intentions
and in the single core world that it was invented in, it probably made sense.
Now that we know better nobody is going to make that mistake again, but now
everybody is up to their necks in legacy code and the only way to get out of
it is a full rewrite.

~~~
yuhong
I really wish the restrictions can be reduced so @pmarca etc can tweet more on
the companies of which they are directors. I am thinking that Reg FD should be
pretty broad too, making it clear that most public social media posts qualify
while private ones may not be (providing list of examples would be a good
idea).

------
maxlamb
reminds me of a related and interesting read on an interview with
Kickstarter's founder/CEO on why he doesn't want to sell or ever go public:
[http://www.fastcompany.com/3051328/fast-feed/kickstarter-
ceo...](http://www.fastcompany.com/3051328/fast-feed/kickstarter-ceo-we-dont-
ever-want-to-sell-or-go-public)

Companies that are built with a true mission and sense of purpose, for the
(very) long-term, and are either already profitable on their way to
profitability without raising additional money do not have any real reason to
go public aside from greed. This concept is so against the common mindset that
it seems very few people are able to see that. The original intent of going
public (i.e. prior to 20th century), was precisely because there was no easily
accessible venture capital like there is today, so that was pretty much the
only way to raise significant funds.

That explains why so many companies that IPO seem like quasi-pyramid schemes,
driven more by money than a long-term sense of purpose, a la Groupon or Zynga.
Although of course that could be said about most public companies, hence why
most go to shit, but I'd argue that companies like Kickstarter do not have
constantly increasing profit as a primary goal (of course profit is one of its
goals, otherwise it won't be around long, just not the primary goal).

------
Animats
What the guy from "Nasdaq Private Market" seems to be pushing is a semi-public
offering - like an IPO, but only for "qualified investors". This provides an
exit for the original investors.

------
sjg007
IPOs will come back. Too many people are pissed off that their vested equity
is locked up and effectively worth $0.

------
hkmurakami
This data seems pretty meaningless without being able to tie their sentiments
to their funding situation.

------
dawhizkid
Is this really that surprising?

~~~
jamesblonde
No for readers of HN. But for Bloomberg subscribers, maybe.

