google and the price of IPOs

The Entrepreneurial Mind has an entry on Google and their IPO. The question in the post: is it worth it.

The IPO puts the company in a fish bowl. All of the decisions that were made in private must now see the light of day. Unique companies become quite common as a result.

The lure of the big pay day? entices many to consider an IPO. For Google, it could mean billions of dollars in market capitalization. It may sound strange to ask such a question when billions of dollars are on the line, but here it goes: at what cost? The corporate culture of Google will change over time once they go public. It will have to. It is an inevitable outcome of an IPO.

He goes on to question if they’ll be able to support their lifestyle (e.g. the Googleplex) after a bad quarter or two.

My IPO experience was that the corporate culture changes once you’ve decided to IPO, not after the IPO. It starts with the ramp up in hiring — standards for new hires in terms of ability and cultural fit decline, because every day the decision of who to hire moves farther and farther away from the founders. Inevitably, more people who are there just for the IPO start to sneak through the filter and the culture starts to focus more and more on the the IPO and public valuation.

By the time you get to IPO, the company has changed so much that many of the founders feel alienated. As their options vest, they cash out and leave for greener pastures or move off on to “special projects”.

After the IPO, because the investors and the new managers are focused on valuation, the business is optimized for near term stock price. That means delivering steadily increasing profits, if possible. You’d be surprised the games people will play to extend the curve just one more quarter.

This can be just as bad when things go south — stock driven execs pursue the numbers single-mindedly even at the expense of the companies basic ability to execute on its strategy. For example, at a software company, I understand trimming staff in some areas where the staffing requirements scale with number of customers. But why would you do across the board trimming? Why does it suddenly take you fewer engineers to meet the market requirements for next quarters release? It doesn’t. It takes fewer engineers to meet next quarters profitability because revenue has gone down.