Sep 22, 2016 ยท 18 minutes

In the latest episode of “Halt & Catch Fire,” Mutiny’s VC blithely suggests the small, very dysfunctional startup that’s barely debugged and launched its electronic payment product should go public.

She admits it’s a little early, but makes the argument that a $20 million acquisition offer from CompuServe sets a valuation floor, and that once others hear about that offer, they are going to flood into Mutiny’s space. Right now, she argues, they are the leader in a nascent untapped space. The time to strike is now!

It’s hard to believe that was the dominant thinking around tech IPOs only a few decades ago: Get out, use it to create distance from competition, and either grow your business in the public spotlight or fail in the public spotlight.

Sure, a lot has changed in the reality of the public markets-- new rules separating banking from research, quick trading hedge funds, activist shareholders-- that’s caused this change in culture.

But when you look at a company like Uber-- who still refuses to go public, has such a high valuation to grow into, is beset by lawsuits and going to have its whole industry upended in the next five to ten years-- you have to marvel at just how far the psychology has shifted.

The question for most of the decacorns and a lot of the unicorns is: Have they pushed the stalling trend too far this time around?

Of course, the reality is they have gone public in a sense. Out of 181 unicorns, Fidelity-- just the kind of company that used to buy stock in IPOs-- has invested in twenty four of them. That’s more than any other investor, and it includes Snapchat, Uber, and Pinterest. Those stakes on paper are worth a combined value of nearly $100 billion, according to a recent report by Pitchbook.

In 2015, global mutual funds have invested nearly $24 billion into 192 “VC” transactions, the highest amount ever and an increase of 66% from the prior year.

See that mega round you just did? It’s what they called an IPO back in the Halt & Catch Fire days.

Of course, those “quasi-IPOs” come with a big trade off: Very little actual liquidity. Founders are trading true liquidity for them, their investors, and their teams for avoiding the “hassle” of being public.

Sure, we get the hassles. We’ve just watched a painful decade of Yahoo’s intractable hassles, and Twitter has now stepped into that void. Still, let’s look at the post-IPO “hassles” of the three biggest companies of the social media era a little more closely.

LinkedIn: Had a highly successful IPO, causing the Valley to re-think the value of a comparatively stodgy social network that the tech press loved to say was being destroyed by players as varied as MySpace, Facebook, BranchOut and any other potential threat. It was Wall Street-- not the Valley-- that appreciated the value in what LinkedIn had painstakingly built.

And early this year, when LinkedIn’s stock got slammed it had to do with a funk in the broader markets that only Amazon and Facebook avoided, yes, But it also had to do with LinkedIn. Would bets on content and yeild more growth in the future? Was the company paying too much in stock compensation?

LinkedIn wisely saw where this was trending and pushed to make a big move it may not have without the pressure of Wall Street: sell to Microsoft for $26 billion from a position of strength. There will only be so many deals like that out there, and LinkedIn wisely grabbed one. LinkedIn may be many things in the future, but it won’t be the next Yahoo.

Being public strategically helped LinkedIn twice.

Facebook: The most anticipated and most botched IPO of the three. No sooner had it filed its S1 than did Wall Street start panicking over Facebook’s paltry mobile revenue. The fear was that Facebook was at that moment, what I’m arguing a lot of the unicorns and decacorns are now: Going public once they’ve already experienced much of the growth in their core market, and yet still hoping for a valuation that assumes that kind of growth is ahead of them.

The pressure forced Facebook to get far more aggressive on mobile than it likely would have as a private company. The result: Facebook may become the first $1 trillion market cap company, because it dominates three of the largest messaging platforms and messaging will be bigger than social. Facebook’s CEO Mark Zuckerberg has since admitted being public made the company much better.

Twitter: The IPO went great, and then Twitter’s slowing user growth, struggles to get mainstream, comparison to Facebook, and leaky board room drama began. While there is talk of an acquisition, I’ve long argued Twitter is like a falling knife. At some $13 billion it’s still too expensive for the companies who can afford it to buy it, given its declining user growth and the fact that companies like Snapchat-- and even Facebook Live-- have leapfrogged what Twitter video should have become.

Did being public make Twitter “better”? That’s hard to argue. But would staying private have solved Twitter’s indecisive, slow, and iterative product problems? I don’t buy that one either.

Let's look at the closest thing we have to a "private Twitter": Pinterest. The day to day of running and working for Pinterest may be better, but I'm not sure Pinterest's long term prospects are. It has struggled to grow, struggled to get international traction, and even major redesigns are designed to go largely unnoticed.

As I argued before with Pinterest:

It doesn’t matter how “hot” the demo is. If you are online only, and only big on one demo, one slice of one country, there’s strictly a limit to how big you can grow. Even if that demo is as desirable as all media, television, celebrity, and athletes as was Twitter’s unique “demo.” If you want to be a company worth tens of billions, you have to have more.

It's hard to imagine Pinterest’s fate reverses dramatically as a private company, it just has a lot less noise, stress, and pressure around it.

If Twitter and Pinterest will face the same eventual fate, which is better: To be a large, influential company who is unable to pull out of a tailspin because it’s being battered by the glare of the public markets or a large, influential company who doesn’t have the glare or pressure of the public markets, but also largely kept its massive growth valuation… unrealized.

Well, Mike Maples gave the answer from the investor point of view loud and clear at Pandoland a few years ago:

“The first thing I’d like to do is have a public chance to thank Dick Costolo for the job he did. Some people may criticize him but you’ll never see me be one of those. He took over the company when he had crazy drama and all kinds of stuff to deal with and made my stock 30 times more valuable in less than five years, and built a real team... took it public. I remember a year ago everyone was saying Twitter was the Anti-Facebook and had their act together on this IPO... There is something vexing about that company where people are just bipolar in their opinions of it.”

He drew the line at too much sympathy for Costolo’s “what have you done for me lately?” war with Wall Street.

“There are two billion in poverty in the world," he said, "so I don’t worry too much about people who get rich running companies having scrutiny."

Indeed, think of all the billionaires who started companies that eventually waned. Jerry Yang, Tom Siebel, Scott McNealy. Venture capitalist Stewart Alsop used to brag about a house in Santa Fe that TiVo bought him.

Sure, there's something unsatisfying about a VC making money when it shoves a company onto the public markets that later fails. We saw that trend pushed to a dangerous extreme in the late 1990s. But before you get too hauty, remember, VCs actually making money is what enables the next entrepreneurs to raise capital with little more than an idea. 

An IPO-- even if the company later “goes Yahoo”-- is certainly better for early stage employees too. And isn’t part of the promise of the Valley that they eventually get rewarded for building something large?

And you could argue, it's better for the Valley ecosystem. Talent locked inside these companies not only gets freed up, should they chose to leave post-IPO, but they arguably do so with cash in their pockets. The fabric of Silicon Valley is about this flow money from early stage employees of a company that went public into new companies.

Pinterest and others like Dropbox, Evernote, and maybe even Uber are the exaggerated extension of a cultural trend that started in the Nasdaq crash of 2000: A switch from "success" being an IPO to "success" being control and having growth and dominance on your own terms.

Google started this. Pundits started expecting its IPO in 2000. It didn’t come until 2004 and it had bizarrely unconventional terms. It had a dominant enough business in paid search and a small enough float, it could name any terms it wanted. And for those who bought it, the bet paid off. Since then the stock has risen an astounding 1,294%. The price back then was just $85.

Emboldened by the success of that strategy, Facebook pushed it even further.

As I wrote for TechCrunch back in 2011, Facebook’s “Netscape moment” was its Yuri Milner deal that gave some early investors, employees, and founders the option of early liquidity and a then sky-high valuation that put off the need to go public.

From that story:

...the Netscape moment wasn’t so pivotal because it was an initial public offering; it was pivotal because of what it represented. It was pivotal because of the impact that it had on entrepreneurs– allowing them to build companies based on a set of new rules, not the old rules that had been defined for them. It was about a company not only disrupting an industry, but disrupting the laws of gravity associated with being a startup itself.

Just as Netscape proved you didn’t have to be profitable or fully-baked to go public, Facebook has proved the inverse: That you don’t have to go public to get liquidity for investors, a huge marketing event, and cash to acquire competitors and keep growing. That you don’t have to go public just because the playbook says so. One was about pushing a wave of companies to surge towards an IPO faster; the other has been about giving permission to a wave of companies to put off the IPO as long as possible– but the two have been equally dramatic changes that have impacted the broader economy. Netscape gave Wall Street and investors a new high growth industry to pour money into; Facebook– starting with that first DST deal– has deprived the market of it. But because we were so conditioned to view the next pivotal moment in startup economics as an IPO, we continually saw these secondary deals as something leading up to that pivotal moment– not as the pivotal moment that changed everything itself.

And these newer generation of top companies have pushed it to even further extremes. The reason that Uber is the highest valued private company in Silicon Valley history isn't because it's the best, it's because at any other point-- even the Google and Facebook era-- the company would have already filed to go public.

And thanks to low interest rates, a crush of global cash wanting to invest in the Valley who can't get into venture funds, and a rise in corporate investing, there was no reason they had to file.

Put it this way: If someone told you you could have five times your annual salary right now, and not have to show up to work or check in for another five years, would you say yes? Of course you would. You’d have total freedom and no accountability of facetime, the risk of bad reviews, and the  ultimate work/life flexibility.

And what would happen? Most of us wouldn't get as much done without any of that accountability or pressure.

I see this in my profession all the time: Reporters who are used to meeting daily, weekly and monthly deadlines, lose all structure and focus when they have a year to write a book. My first publisher told me that some 85% of their authors file late.

There is no reckoning in the unicorn class that everyone expected to happen by now. The deals are slowing, but they are still happening. Meantime, some assets are getting plucked off at prices that are -- at least-- face saving.

CB Insights reported this week that for the first time in six quarters, there were more VC backed billion dollar exits than there were new private companies achieving a $1 billion valuation. Well that trend is certainly-- finally-- moving in a direction that makes some economic sense.

But it’s worth noting: Not all of those $1 billion exits were unicorns, and that most tech companies are still exiting for less than $50 million, some 53%. Another 20% exited between $50 million and $200 million. Just 4% of exits were over $1 billion. And there are nearly 200 private companies priced at that level right now.

If Unilever buys Honest for the rumored $1 billion, it will be yet another staggering exit for a ecommerce company. It will also be a “failure” in some sense, because that’s lower than its private valuation.

Dropbox, it seems is biting the bullet. When rumors came out it was meeting with bankers, much of the press questioned the timing of the move. "Haven't they see how Box is doing?" went the easy Twitter joke. Rather, I argued, Dropbox is far more in touch with reality than a lot of unicorns:

Is it possible that the king of the Y-Combinator kids is the first decacorn CEO to grow up? To accept he’s raised more than $600 million in funding from investors and at some point it’s his job to give them a return. That he can no longer afford to buy $100,000 pandas. That he may have gotten out over his skis with past valuations, and if so, he’s going to have to take the hit at some point and keep moving forward.

More to the point: Imagine what moves Dropbox could have made if it had gone public earlier. Could it have done a WhatsApp-like or even Oculus-like deal? Could it have snapped up Slack? Could it have even snapped up pieces of a Microsoft-like collaboration suite of products like it tried to with tiny Mailbox? Imagine if the discipline Dropbox has admirably enforced on itself now, had been enforced years ago?

Pinterest should follow suit or find a suitor.

And what of a company like Evernote? It had admirable ambitions in an era of quick-flips to build a 100-year-old company, and used its private rounds to get the right kind of long term investors in the company before an IPO. As founder and then CEO Phil Libin explained to me, the hope was to get these investors in now, and make the IPO as much of a non-event as possible. It wasn’t a bad strategy. But Evernote has seemingly stagnated, and Libin has not only left the CEO role, he’s recently left the board.

What happens to Evernote now?

Others still, are stubbornly sticking to the no-IPO strategy. While many expected that Uber selling its China business to Didi was a path to an IPO, I’ve argued the opposite: It’s a way to conserve its burn rate and cash to stay private longer. This month, others have since backed that thinking up. Airbnb is also likely to put off the IPO, given its mega round in progress.

And because Uber is delaying its IPO, Lyft can't go either. As we’ve written many times, ridesharing is a commodity business. Cash is a weapon in that battle. When Lyft capped spending, its growth slowed. A Lyft IPO would possibly give them the warchest to grab more marketshare. But because it’s a commodity business, Uber holds Lyft’s testicles in its pugilistic hands. Imagine the roadshow: Uber suddenly cuts its rates by 50%. How does Lyft’s management respond? Lose market share or inflate its spending at that pivotal moment? Remember: Uber has a history of sabotaging Lyft’s fundraising.

Some have argued Lyft should be “a LinkedIn” or “a Box” in this fight, going public first. Or as Frank Quattrone once described the dynamic the “John the Baptist” to the Jesus IPO. But -- while competitive-- neither of those companies were in sheer commodity businesses. When it comes to Lyft and Uber, the apps are identical, the pricing the same, and the same drivers drive for each company.

Bill Gurley has been screaming about it. It’s clearly dawning on Drew Houston. And others are starting to whisper about it. Have the best companies of this era, the Ubers, Lyfts, Airbnbs, Pinterests and so many others unicorns-- and their investors-- simply missed their window?

I know, I know. We all like to say great companies can go public anytime. But with the exception of a handful of consumer tech companies, every consumer business has a lifecycle. Timing matters. Not in quarter-by-quarter measures perhaps, but over years certainly.

I’ve argued this before:

Only a handful of companies -- Amazon, Facebook, Google, Netflix, and the like-- manage to grab onto a second thing. Or a third. To survive the next major inflection point, or be innovative, paranoid, or nimble enough to grab onto the next wave.

For everyone else-- and these include many amazing companies lead by amazing management teams-- they inevitably start to decline...

...So let’s assume that there will be, say, five companies with the luck, core business, and skilled executive team of an Amazon, Facebook or Google in the current crop of unicorns.

The rest-- at least the the lucky ones that survive -- will fall prey to this cycle.

Public market investors-- hedge funds, mutual funds and the like-- understand this. They also get that the biggest surge of growth for a company like Google and Facebook came just before and just after those companies went public. As companies put IPOs off longer, that’s the reason these investors started bidding up private stakes. The cycle of life was the same for these companies, the IPO was just being moved once the company was larger and a lot of growth had already occurred.

So far, that’s worked out OK for a company like Facebook, Twitter or LinkedIn because all three ultimately had successful (if choppy) first six months to a year trading as a public company.

What if that window gets pushed too far? What if the peak of a company’s value occurs when its still private? And not because it has an unreasonable valuation, but because the next wave of technology comes and the slow decline that would normally happen in the public markets happens before the company can even get public?

Here's the most interesting bit to watch: A single decacorn is thinking differently. Snapchat. Snapchat is younger than a lot of these companies and reports are that it is eyeing an IPO sooner rather than later. That could mean 2017. And people close to the company I’ve spoken with have confirmed those reports. Now, a lot could happen that changes this. This is still a company building its ad business with some lofty projections out there. It’s at some $350 million in revenue now with a near $20 billion private valuation.

But Snapchat has likely studied tech IPOs of old. Investors will pay up for growth. If you want to maintain a valuation that isn’t rooted in actual numbers, it’s best go when the growth still looks good. When there’s still a future story to spin.

It’s interesting that Snapchat -- which is based in LA-- continues to buck the Silicon Valley group think. It was the only major messaging platform that didn’t sell to Facebook for a (then) inflated price of some $3 billion. It has openly mocked the Facebook-driven surge towards programmatic advertising as “creepy” and the entire concept of Snapchat is a reaction to a permanent Facebook world.

Snapchat-- which has rejected so much of recent Valley thinking -- may just be the company that shoves the IPO pendulum back the other way. There’s enough promise in the company now that a strategically planned 2017 IPO will at least make investors and early believers some cash.

And if you can’t be one of those handful of companies that enduringly "change the world" for decades on end, that’s certainly a nice backup prize. It gives you -- and investors, employees-- a financial win at least. And a chance to do it again.

Just ask Jerry Yang and Mike Maples.