IPO? No Thanks, Say Most Entrepreneurs
Just a few weeks ago, many wondered whether the Facebook IPO and all the fallout--dropping share price, angry investors filing lawsuits, regulators mounting investigations into the process--would kill off the taste for IPOs, at least in the tech sector, for a while.
Apparently Wall Street either has a shorter memory than assumed or several small companies filing IPOs in the next week or so are willing to take a chance. ServiceNow, EXA, and Tesaro are all ready to roll the dice in an attempt to raise money from the public markets and, presumably, let some insiders cash out.
All three are small enough in revenue that they probably fall under the JOBS Act, which reduced the amount of paperwork and number of constraints on companies that have under $1 billion in revenue and that want to have an IPO. The idea was to make it easier for smaller companies to enter the public markets and raise the money they needed for growth and, as a result, hire more employees.
If legislators thought that there would be a stampede of entrepreneurs lining up at the doors of the SEC to file their S-1 paperwork, they should think again. A study of 6,000 small business owners by Pepperdine University's Graziadio School of Business and Management and Dunn & Bradstreet Credibility Corp. showed that the vast majority didn't expect the new legislation to make any difference. Only 1% said the new law would make it more likely that they'd go public.
Big majorities of the entrepreneurs said that the JOBS Act wouldn't have any affect on their decision: 82% of those with revenue between $5 million and $100 million, and 76% of those that made less than $5 million.
Staying Private Makes More Sense
Instead of going public, most of the companies will pursue traditional loans from banks or credit unions, depend on credit cards, or look for funding from community development organizations. One of the factors is that it's unclear to many businesses how the JOBS Act works. In addition, other provisions of the legislation expand the number of private investors a company can have, from 500 to 2,000, which could reduce pressure on some companies that would have had to go public as Facebook had to.
But there are probably other factors at work. Filing for an IPO and then remaining public is an expensive proposition. I've heard estimates that it can cost a company $1 million a year or more to undertake all the necessary compliance. Add in the potential loss of control--most founders won't be able to demand the conditions of absolute control that Mark Zuckerberg received--and the need for transparency that can clue competitors in on your strengths, weaknesses, and plans, and you've piled up a lot of reasons not to rush into going public.
ERIK SHERMAN | Columnist
Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.