Why being a non-profit is not a good IPO strategy…

Jessica at the Information wrote a thoughtful piece about upcoming IPOs here: https://www.theinformation.com/the-truth-about-next-years-ipo-rush

I wrote a response to that which I think is worth posting here:

I think the challenge is that venture tends to value companies on value = growth * growth and public markets value = growth * profit. The impedance mismatch at the point of IPO is very rough if you are still a non-profit. It’s also likely that your board is filled with venture folks who may understand public market valuations in principal but are still biased towards growth. So you see companies hemorrhaging money in order to maintain growth rates, but public markets can’t value those companies.

When we went public at NetGravity, we were still a non-profit, but we thought we had a pretty linear path to profitability in four quarters, which turned out to be right. I would say that part of IPO prep should focus on that turning point, with four quarters out probably being about the max time the markets can suspend disbelief if you are making steady progress before they label you a “dog”.

I’m a big fan of going public, it creates accountability in a company and often a renewed sense of purpose. But I cringe every time I see a tech company burning cash and going public. Transitioning from growth at all costs to a solid business model is really hard and doing it in the public eye sucks, mostly for employees who want to see growth in their stock, not the kind of bounciness this creates.