Shooting for an IPO? Take These Steps Now Before It's Too Late
When LinkedIn went public in 2011, its share price soared over 100% on its first day of trading to the amazement of traders and tech investors. The media went wild, and the company’s subsequent public market success helped pave the way for the Facebook and Twitter IPOs. But despite the jolt it delivered to the market, LinkedIn’s blockbuster public offering wasn’t a fluke. It was a plan well executed.
Glenn Solomon of GGV Capital watched LinkedIn’s successful debut from the sidelines, but that same year, he helped Pandora achieve its $2.6 billion IPO, and he’s helped steer others like SuccessFactors and Nimble Storage to successful offerings too. If he’s learned one thing from his near two decades of experience, winning IPOs requires careful preparation and foresight from the beginning (as in, never too early).
When you’re 10 people in a room cranking on a product, a public offering may seem like a lifetime away, but if you don’t start thinking about an IPO early, your chances of making it happen are greatly diminished. In this exclusive interview, Solomon shares three battle-tested tactics that have guided numerous companies to great IPOs, and two fatal mistakes that he sees get made all too often.
THE THREE TENETS
When you’re just starting out as a founder, there’s a lot to think about: Are you hiring the right people? Are you shipping fast enough? Where is your product-market fit? An IPO seems like the last thing that should be on your mind — something about counting your chickens before they hatch.
But Solomon disagrees. You should keep an IPO and success as a public company as a goal from your earliest days. Fortunately, early on the best way to do that is to only focus on three easy rules. Check them off at regular intervals and you'll be in good shape.
1. Develop visibility and predictability.
When it comes to attracting investors — public or otherwise — predictability is king. Companies with volatile growth patterns are, as a rule, less attractive than companies that can clearly predict what’s going to happen two months, two quarters, two years down the line.
“Companies that have a firm understanding of how they’re going to perform financially in the short and medium term do much better than those that have unplanned results, even if they do better than anticipated,” says Solomon. “You might think you’re winning by beating everyone’s expectations, but the right people place their faith in steady growth, not surprise-driven, hockey-stick growth.”
Cementing this predictability can be painful and even tedious for early-stage companies. Everyone talks about breakout growth when the better route is to consistently put points on the board. “You have to stick to your vision,” says Solomon. “Get the product right before you do anything else. Scaling up and building revenue streams can come later.” Impatience — as glorified as it’s become in the tech world — is still a red flag for investors.
Since joining GGV Capital in 2006, Glenn Solomon has led investments in Pandora, Square, Zendesk, Successfactors and more. He focuses on enterprise software-as-a-service, cloud infrastructure and mobile plays, and has been a member of the Forbes Midas List since 2009. He tweets at @glennsolomon and blogs at www.goinglongblog.com.
It's okay to say, 'We're not going to be as big as possible as fast as possible, but we'll stick to what we do well.'
“Build something that's going to work for years and years,” says Solomon. “That’s what you need to do to go public. And you need to make sure as many people know they can rely on you as possible.”
Part of LinkedIn’s strategy was to stick to its vision and plan for gradual growth — no easy feat when Facebook burst into the spotlight as the social network to watch. By resisting the urge to grow at all costs, LinkedIn allowed itself time to build and protect its key asset: Its database of professionals’ information and linkages.
“They really focused on building the strength of their product — that was their focus from day one,” says Solomon. “Getting that product right took time, but it paid off in the end.”
2. Make sure the market is there.
Conventional wisdom tells startups to go public when revenue hits $100 million. But the benchmark shouldn’t have anything to do with revenue — it should be all about growth potential.
“The time to go public could be at $50 million or $250 million,” says Solomon. “No matter how big you are today, the question is: Do you see a clear path to being three or four times the size you are today in two to three years?”
If the answer is no, you’re going to have limited options. That’s why startups need to start thinking about this when they still have the agility to pivot or divert resources.
“You might need to invest in expanding your market, building new products — if possible, acquiring competitors or partnering with companies that can expand your opportunities,” Solomon says. “The only way you can do any of this is if you assess your situation when revenue is still in the single digit millions. That’s the only time you’ll have this kind of flexibility.”
SuccessFactors, one of the companies Solomon advised to a strong IPO, started out focusing exclusively on employee performance evaluation software. Realizing its market needed to grow in order to hit their revenue targets, CEO Lars Dalgaard led the company to rapidly diversify its offerings into related areas: Employee goal setting, stack ranking, succession planning, etc. By the time the company IPO’d, it had a full suite of products for a wide array of customers.
If you’re still running into roadblocks, either you underestimated your prospective customer base or you're still struggling to find product-market fit — regardless, you have to have a gameplan. Depending on how much runway you have, this could include international expansion, advertising, or paid user acquisition.
The teams that win are always experimenting — always determined to grow their market share.
Once you pass a certain point and you get stuck with your product, your messaging, or your market positioning, there’s nothing you can do. An acquisition starts to become a more attractive option. But if you have the foresight to change course when you’re still small, you can keep an IPO on the horizon.
3. Eliminate single points of failure.
A “single point of failure” could be one of many things: a very large customer, your only distribution partner, a supplier you’re completely dependent on. Basically, if your success depends on an entity external to your business to stay afloat, you’re in a sticky spot. To avoid this trap, you have to diversify as soon as possible — which Solomon realizes can be a tall order for growing startups.
It happens to even the most promising entrants. Just look at Zynga and how much it depended on Facebook for distribution of its money-maker Farmville. If Facebook had decided to bar the company from its platform, that would have been millions lost and a different destiny. It’s easy to get lulled into a false sense of security. That’s why you have to be intentional about diversifying, Solomon says.
“Growing really fast as a young company sometimes means focusing and concentrating on just one distribution channel or one huge customer,” he says. “But this can turn into a major dead end down the road.”
As a startup leader, you might be all about landing business — any business you can. But public investors have very different priorities. They want market size, scalability, strong financial forecasts, continuous growth. Single points of failure pose a threat to all of these metrics. So how can you dodge them?
“It requires patience and more work, but you have to build in redundancies as quickly as humanly possible,” Solomon says. “Maybe you trade in some early growth to build those redundancies. Maybe you have to work at expanding and diversifying your base before you can sprint, but that will give you a degree of safety when you finally do take off.”
THE TWO DEAL-BREAKERS
There are a lot of reasons companies don’t IPO. They're the rule, not the exception. But when Solomon thinks about the most promising companies he’s seen miss the target, they had two mistakes in common — both of which also can be nipped in the bud at the earliest stage. To keep your eye on the prize, it’s all about maintaining great relationships with investors, both venture and public. Here's what not to do.
1. Short-term greed over long-term greed.
Gordon Gekko famously said, “Greed is good,” in the movie Wall Street — and Solomon agrees, as long as it’s the right type of greed. In this case, you want to be long-term greedy.
This isn’t easy. It’s tempting to go for short-term gains. It only seems logical to offer optimistic growth projections to attract investment. But if you downplay your hand and put a lid on expectations, it turns out you attract investors who believe in your company — not just in the numbers you’re telling them.
A few short months or years down the line, broken promises can do serious harm to your startup’s image. It’s nearly impossible to bounce back after failing to become the company you said you would be. If there’s one thing that’s crucial to achieving long-term growth, it’s working closely with your most important stakeholders so they have an honest sense of your status.
2. Don’t be forgettable, but don’t disappoint.
Venture investors have long memories. Many of them are only deeply involved with a handful of companies at a time — companies that they picked because they loved something about them. That’s why over-promising and under-delivering can be so fatal. Eventually the music will stop, Solomon says. And public investors are a different breed.
Most of them are following more than 1,000 companies at once, or have completely turned over management of their investments to someone else to watch for them. When this is the case, and you’re a pre-IPO company, you have to stand out. You have to be reliable but also hot. On trend, but leading your pack of competitors.
The number one differentiator any company can have is to maintain a great reputation.
This is all about doing exactly what you said you would do. Making up metrics is the worst sin in this category, but you’d be surprised how often it happens to hold investor attention, Solomon says.
Groupon is one well-known case where there was a lot of hype. With its lofty fundraising and hothouse press, it was the opposite of forgettable. But things got rocky right before its IPO, and only rockier afterward as public investors realized they’d been sold a bill of goods. Getting to an IPO is only the victory people make it out to be if trading in ensuing months and years turns out well. Otherwise, it can be a lot of hard work wasted.
At the end of the day, going public is largely out of entrepreneurs’ control. The market swings back and forth. All you have to do is compare and contrast Twitter’s positive experience with Facebook’s relatively negative public outing to see how the winds can change. But that doesn’t mean that you can’t give your company the best possible chance possible by insulating against mistakes and abiding by guiding principles, Solomon says. Similarly, when looking at Facebook’s recovery from a tough IPO to a much better trading record, you can see that focusing on execution and managing investors’ expectations will ultimately be rewarded.
With IPOs, you have to maniacally control the things you can.
If you work on steady growth, diversification, and expanding your market, you have a good shot at growing through tough times. If you do it right, when the market swings, your investors will stick with you and see you through.