For many entrepreneurs, taking their company public -- and entering the magical land of the IPO -- is like the startup holy grail. In fact, I've talked to a number of aspiring entrepreneurs who seem to be more focused on a possible IPO than they are on what their startup will actually do.
Of course there's nothing wrong with thinking big. And it makes sense in terms of long-term strategy: Whether going public IPO is a path you should even consider, and if so, what decisions you can make that set your company up for later success.
To find out more, I talked with Michael Fleisher, the CFO of Wayfair. Michael led Wayfair through the IPO process in 2014; prior to that he served as the CFO of Gartner and then of Warner Music, and led both of those companies through the IPO process.
So yeah: Michael knows a little about how -- and why -- to take a company public.
Let's start with the basics. Plenty of entrepreneurs focus almost exclusively on trying to build a company they can take public. Your advice to them?
I generally say the last thing you want to do is go public, but that's because people go public for the wrong reason. They think of going public as an end state... and it's not.
The starting point for me is always the underlying business value proposition you provide to your customers -- and the story you will tell about that value proposition.
Companies spend considerable time and money on the S-1, etc., what it really comes down to is, "Here's an opportunity I'm investing in, and how I'm doing that to serve a customer."
Who is your customer? Over the long term -- and this is really important -- how do you serve them in a differentiated way, that creates value?
Which is not the way many approach it.
Unfortunately, many people start with how much revenue they generate, how profitable they are, whether they have the right CFO in place... but the underpinnings must always be: What is the story? What is the value proposition you provide to your customer?
When I started at Wayfair I knew nothing about consumer ecommerce, but what struck me is the average Wayfair customer: A 45 year-old woman who is dramatically underserved by retail when it comes to her home.
Home is a special place, a place she cares greatly about. But her experience of shopping for her home? In the modest price-point world -- where you want to spend $600 on a sofa instead of $6,000 -- the consumer retail experience is usually terrible. Giant warehouses, limited selection, pushy salespeople who will do anything they can to keep you from leaving because they know if you leave, you won't come back... and you have to deal with that at five different stores in order to find enough of a selection so you can choose a sofa you actually like.
Wayfair has thousands of sofas, customers can shop in the comfort of their homes... we do a number of things the mass market customer had been conditioned to think they weren't entitled to.
That also dramatically changes how you approach customer interactions.
We regularly get on customer calls so we can stay connected. I said to one customer, "You frequently visit our site, but you haven't made a purchase in twelve months. Have we we done something wrong?"
She said, "Honey, you don't understand. I'm going to buy a new bedroom set... but I'm saving up for it. So, I'm looking in the meantime."
Many of our customers are saving up to buy one nice thing this year. That is the customer we super-serve. We use the Internet and a unique model that allows us to carry no inventory and do a really good job for those people.
That, to me, is a story that not only rings true for customers... but also creates a business model that really works.
If you're trying to build a business that can be worth a lot of money, and an IPO is the end goal, you still must think about building a business that will super-serve a customer.
Everything starts there.
The problem is a customer-first attitude can get lost when your business is big enough that "customer" starts to seem like a faceless mass and not a collection of individual people.
My grandfather was an entrepreneur who started a men's clothing store. I grew up working for him. I started as an eight year-old. I swept the store, ran errands, and learned how to sell. I went to Wharton as an undergrad thinking I would work for him someday.
He sold the business while I was in school so I could not go into the business. (Laughs.)
My grandfather's customers came back again and again because he was a good merchant. He provided underlying value. He knew his customers and provided the product they wanted. He took time with each individual. He made every customer feel special, even if they didn't have a lot of money to spend. In short, he built relationships.
That's not so different from what we do.
As I said, every good business starts with answering the question, "Who is my customer... and how do we serve them, and make the right investments to even better serve them?"
Let's dig a little deeper into the decision of whether or not to go public.
Today, many great businesses are staying private longer. If you have a great business and are investing for the long-term, you can keep raising capital because investors understand what you're doing.
Keep in mind an IPO is just financing. Many people think of an IPO as having some special characteristic, but really, it's just financing -- financing that forces you to be more articulate about your business, of course.
If you raise money privately, you can usually get decent value. You may end up with investors that are more involved in your business, and that's okay.
But what you usually don't do is create significant liquidity for investors or employee owners. If you go public you can often get a better price in return for the cost of being a public company and all the reporting that comes with it... but you also create an open market of liquidity.
I know people who see going public as a branding event: Greater visibility, credibility, etc.
I don't buy that. Rarely are the people who see your brand because of your IPO the same people who buy your products. You can almost without question spend branding dollars more efficiently.
In simple terms, go public because you want to raise capital and you want to create liquidity for some group.
If you can continue to raise money privately, and there is sufficient liquidity for you and your current investors, don't go public. One major downside of going public is that it is very hard to continue to take a long-term view of your business when you're caught up in the drumbeat of providing quarterly reports, providing quarterly guidance... and having investors who care greatly about near-term returns.
Going public often changes the focus from long-term to short-term, which over time can fundamentally change how your company operates.
So why did Wayfair decide to go public?
At Wayfair, we had successfully raised private rounds. So for us, the IPO was about creating liquidity for our employee base.
Our two founders started with the notion that every employee should be an owner, so they set up a compensation plan that gives everyone an incentive to take a long-term approach to the business.
Every public company has to publicly list officer compensation. Check out ours and you'll see that the top salary is $250,000. No one makes more than that. The rest of our compensation is in equity.
So, for example, when the founders hired me, they wanted me to care about making the company worth a lot over the next ten to twenty years, so they gave me an incentive to make the company valuable over the long term.
By the time the company reached a certain level of success, creating liquidity and making it worthwhile for employees who took lower cash compensation was really important to us.
I'm sure offering lower salaries in return for equity also helped you recruit people who believed in the culture.
No question:There is a self-selection process. Some people decline, saying, "If I'm not paid $X..." and that's okay. Our view is that if we do things right, some of your compensation will come to you over time, and could be worth a lot more over time... but you have to believe.
Ask some of our largest public shareholders and I'm sure they will say the founders and the team are really vested in the long term. When I sit with potential employees, the story I tell them is about our customers, how we super-serve them, and how, over the long term, we'll win.
In any business, long-term value creation is built by customers who love what you do... and keep coming back.
What is your rate of repeat customers?
About two-thirds of our orders come from returning customers.
If I could only tell people one thing about building a business, I'd tell you about returning customers. Have a bad experience at a restaurant and you probably won't go back. Most businesses are extremely unlikely to get a second shot. You can't spend enough advertising dollars to get someone back if they had a bad experience.
Like Edgar Bronfman at Warner Music would say, "How much will you pay for a song you don't like?" You won't.
Finding that story, finding the underpinning of your business, is critical whether you're public or private. It makes you more strategic about spending, because you know who your repeat customer base is. It makes you focus on keeping them happy and satisfied. And it helps you stay focused on finding your next customers.
Part of our culture is that we talk publicly about how it costs $45 to get a new customer in the door. So internally, we think, "If we're going to spend $100 (on something), that could be two new customers that could have a huge lifetime value..." Thinking about it that way keeps you long-term focused.
And it keeps you focused on what you can do to get each customer to be super-satisfied so they will keep coming back.
One example: Three years ago we started investing in making our own last-mile deliveries in over twenty metropolitan areas.
Wait. That goes against how nearly every retailer handles shipping.
Maybe, but think about it this way. You can have an amazing purchase experience... but if two people show up who don't work for us, and something they do to ticks you off... that can ruin your entire experience.
If you can take the worst part of an experience and make it the best part of the experience, what would that do for your business?
The NPS (Net Promoter Score) score of those customers is much higher than when third parties make deliveries, and NPS is a leading indicator of whether you will come back or not.
Starting customers with a great feeling is important, but leaving them with a great feeling is even more important.
That's a really good point. We bought a pallet load of marble for a bathroom renovation and we got a great deal, the quality of the marble was great... but it took two weeks to deliver, and for a few days we couldn't even find out where the pallet was. Then one day they called and said, "We'll be there in an hour," and we were a hundred miles away.
It seems odd that the most expensive item you can buy often has the poorest delivery service.
One of our founder says, "You can buy a $7 UberX ride and know for the entire time you wait exactly where the vehicle is... but yet you don't know where your expensive furniture is, and all they'll tell you is that they will probably be at your home some time next Tuesday."
That's why we have real-time tracking to create a better experience. And so we can treat our customers they way they deserve to be treated.
So to sum it up, going public isn't necessarily a goal. It's just a decision you may or may not choose to make.
Ultimately it's all about the value proposition you provide, over the long term, to your customers. Everything starts there. Going public may -- or may not -- just be another step in that process.