It's a familiar tale: A hot startup announces plans to go public. Demand is brisk, the company makes a strong market debut, and its stock price and investors' expectations climb. And then, in the following months or years, comes the bad news: quarterly losses, lack of growth, layoffs, and a tumbling stock price.
What goes wrong? For starters, the focus on market valuation. Just as a splashy wedding
is no guarantee of an enduring marriage, stock price at IPO says little about a company's long-term prospects. Truly successful IPOs are about more than creating hot products--they are about creating sustainable companies.
To better measure the success of the companies on Inc.'s 2017 Founders 10 list, EY studied median benchmarks for the biotechnology, life sciences, pharmaceutical, and technology sectors at the time of their IPOs and one, two, and three years later. Instead of the price of shares, we evaluated the influential financial factors of revenue, profit, and employee head count.
These metrics, which isolate growth and performance, point to companies that were well-prepared for their IPOs, and which took the steps needed to succeed long term. Their strong results reflect their investment in infrastructure and important institutional processes such as human resources, finance, and internal technology. These well-run companies attract and retain top talent, and predictably meet investor expectations.
Today, companies--especially highly valued tech startups--are taking longer to go public than during the booming IPO market of the late 1990s to early 2000s. With greater access to venture capital and other private funds, they see less of an upside to raising money in the public markets. Yet several so-called unicorns, startups valued at $1 billion or more, are maturing such that an IPO may someday make sense for them. For them or any company still planning an eventual IPO, it's crucial to prepare your business to be sustainable--beyond any first-day pop in stock price. Beyond financial metrics, there are more intangible indicators of IPO success. These so-called soft metrics look at the company's leadership team, which includes its founders, C-suite executives, board, and advisers. Just as sustainable companies must invest in their infrastructure,so must they invest in the right managers.
Ultimately, an experienced set of leaders means a better-prepared, more sophisticated company--one that is likely to see its revenue, profits, and employee head count grow. A company that gets all this right will be rewarded with higher market value.
So, instead of looking to stock price at IPO, we should turn things around and focus on the longer-term metrics that matter. Only then will stock price indicate success.
How Inc. Did It
The Founders 10 have been chosen from among North America-based, founder-led companies that went public after January 1, 2014, according to IPOScoop, and had the most patent activity (including grants and applications) in 2016, according to IFI Claims Patent Services. Ten of these companies, our honorees, have matched or outperformed the median annual revenue or profit for their peers in pharma, biotech, or tech, as tracked by EY and Capital IQ. Additional Research: Victoria Finkle