Why an IPO is often DOA

It’s time to question the value (destruction) of going public

Welcome back to The Workaround. I’m Bob 👋

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Today, we lay to rest another promising private company, through this Initial Public Offering… of condolences. From unicorn to eulogy. Assets to ashes, trust to dust.

Is there anything in the business world more celebrated than an IPO?

After many years of skill, luck, and grinding, your company name goes up in lights—with its own ticker symbol—and people worldwide can own a piece of the magic you and your team made.¹

Of course, a lot of cash comes along with it, too. Some access it before others, of course…

An IPO is a game-changer for a company’s founders, investors, employees, and countless stakeholders who helped them get there.

But the game of company-building changes dramatically the day after that bell rings. For most, it is the first day of the end of the success story.

We’re glorifying a path that ends up hurting most employees, shareholders, customers, and stakeholders, so that a very small number of people get an outsized cash and ego outcome.

I think it’s time to re-examine the actual value of going public, especially for founders who aim to build something that lasts.

I started thinking about this after hearing a 10-second segment within a 2-hour interview with Howard Schultz last summer. Since then, I've gotten more data and heard direct experience from friends.

The result of months of marinating has me seeing my ignorance and a need to confess my sins.

IPOs Miss the Market

Before I dig in further, let me say that this post is not a full accounting of the value of an IPO or publicly traded companies. Many innovations from investor-backed companies have made our lives infinitely better. Over 60% of U.S. households hold shares of public companies, which have proven to be the best-returning asset class for long-term benefit. On the other hand, just 10% of the wealthiest people own 93% of public shares. And these investors’ obsession with short-term performance often hurts long-term potential.

I can’t address everything right or wrong in a Milton Friedman marketplace, but I think business builders and investors are due to re-examine the IPO path.

In theory, an Initial Public Offering is a tool for very strong companies to raise money to pay back their private investors, reward founders and employees for their efforts, and secure funding and credibility from public investors (like your Mom/Dad and their pension/401k) that allow the company to keep growing.

In other words, you’ve got a rocketship of a company and you’re selling tickets to help it keep roaring into orbit. And since the IPO is a long, government-regulated process with serious investment bankers approving and non-accredited investors buying in, the rocket should be a pretty safe ride.

Unfortunately, the data proves most of them can’t rise to the market’s orbit, and many eventually crash and burn…

We could start by looking at Special Purpose Acquisition Company (SPACs) IPOs—the blank check companies that got hot a few years ago. From March 2021 to February 2023, the valuation of PitchBook's SPAC Index declined by almost 80%.²

Chamath Palihapitiya, the SPAC King, personally made $750 million from special benefits that go to sponsors, regardless of market performance. His companies declined 73% (and counting). For some reason, people still listen to this guy…

The SPAC wave died down, partly because regulators—those folks who try hard to keep us from being taken advantage of—cracked down. However, out of 168 companies that debuted on U.S. exchanges in 2024, the average total return was just 8%. This lagged behind the Nasdaq Composite Index, which gained ~35% during the same period.³ You would have made over 4x your money by putting it into a boring fund instead of buying IPOs.

However, this trend goes way back: A study⁴ of over 9,000 IPOs from 1975 to 2014 showed that, on average, these companies underperformed the market by 8.7% over three years.

“Try to be consistently not stupid, rather than trying to be very intelligent.”—Charlie Munger.

This is why any good financial advisor—like mine—won’t let their clients buy into a company’s IPO until at least a year after it’s left the gate. As a friend once told me, the job of a financial advisor is not really to beat the market—it’s to keep you from doing something really dumb every year or two.

Why? Arbitrage

How did we get here? Why do newly public companies mostly fail to keep up with the broader market they enter?

First, you’ve got to look at VC and PE firms. They need to deliver returns to their investors, and that means they need the company to get to some exit so they can sell their shares. And since they’re the ones who own most of the shares—and often have a ticking clock to pay back their investors—they are motivated to move.

A funny thing happens in a marketplace when the seller—an investor in this case—knows much more about the item for sale than the buyer—like your Mom, Dad, and their pension fund or 401k: You’re the last sucker left holding a lemon.

I learned this from a VC a few years ago…

I was an independent board member of an early-stage startup. The other board members represented VC funds that had put money into the company. We flew in for meetings each quarter in a conference room of the company’s headquarters. Typically, we would discuss company business all morning, then chat over boxed lunches before flying out.

I recall one such lunch chat in which the lead investor, “Rick”, shared his experiences preparing his firm’s first SPAC. For over a decade, his fund was focused on early-stage startups. But he became enamored with the SPAC boom and convinced his partners and investors to try their hand. They raised $200 million to buy a company in the e-commerce space, and he couldn’t wait to share his biggest learning from shopping the deal:

“I discovered the secret: It’s all just arbitrage!”

With giddiness, he described how public investors were eager to invest in the e-commerce space, and all they had to do was make a company that he thought was worth, say, $100 million, look like it was worth $200 million. In other words, find the next sucker. You know, Mom, Dad, Pension Fund, 401k.

I still recall my reactions at the time: (1) Oh, so that’s how the world works; (2) Wait, did he just admit this?; and (3) Fuck Rick—and how do I get off this Board?⁵

Your company’s investors see the business as a means to an end. To them, everything is “just business.” Investment banks receive massive fees from an IPO, no matter how strong or weak the company is. It’s not about building to last, it’s building to get that payday and G.T.F.O.

Specific growth and margin numbers must be hit (at any cost), employee count must be adjusted (down), and hype is ramped to ever-higher levels. Everybody runs to put lipstick on the pig and get it to the money trough before reality hits.

Public = Naked and Afraid

Celebrity VC, Bill Gurley, at Benchmark, praises the public markets. He says the forced discipline they bring is great.

Well, per the above, it’s no surprise that a VC like Gurley carries the marketing flag of public markets—they’re the biggest key to returning his investments!

I can offer the backhanded compliment that Gurley at least admits he’s not great at providing discipline to his portfolio companies. Maybe he’d benefit from some hands-on operating experience.

Once all the bright, shiny light of the public market is upon these companies, the truth of their lack of viability is finally revealed. Here are a few examples:

• Nextdoor didn’t want to embrace its core customers, and its stock is at 10% of its IPO price.

• Allbirds was a clothing company that tried to look like a SaaS play. Its stock is down 99%.

• 23andMe had a horrible business model featuring one-in-a-lifetime DNA tests. At $6 billion in value four years ago, it’s now bankrupt.

• Sweetgreen couldn’t figure out how to juggle in-person and digital orders without hurting product and service quality.

• As for Bill Gurley, he wears the badge of shame for issues with WeWork, Uber, and Zynga.

It's not pretty when these things begin a circle of doom from missed expectations.

A good friend worked for years at a digital media company that went public last summer. She shared how the firm exited some of its top leaders just months before the public offering—telling them that they needed to trim headcount to look better in the prospectus.

But these people helped them get to the size and success to enable an IPO. The stock has done nothing but fall since that first day. Several months later, when she and other employees could finally sell some shares, the valuation was less than half its launch price. Oh, but on that date, the CEO warned employees not to sell, as insider trades could send shares even lower.⁶

Things get tougher as companies get used to the quarterly rectal exam known as earnings reports. It’s no longer cozy box lunches with your VCs. Instead, a ravenous cast of investors—who represent your Mom, Dad, and their Pension Fund/401k—want to know why the business hasn’t lived up to the expectations it set. Things get real, real fast.

Unless you’ve built a company that lasts, you’re leadership team tends to behave like heroin junkies looking everywhere for the next fix. And that’s when they’ll do anything to get it…

I’ve sold two companies to public firms and spent years in each afterwards, earning out our purchase price. In both, I saw leaders driven to cut corners to hit quarterly numbers, then forced to double down again and again on company-killing tactics.

In the first, a global agency holding company, the CEO devised a very creative way to save money: He delayed annual personnel reviews. Initially, they were given across the company in January, but one year he moved them out eight months later to August. Some lame excuse about synchronizing business units was given. But the real reason was easy to figure out—it was an opportunity to delay raises for 100,000 employees worldwide. And guess what happened the next year? He moved the review date out several months again!

Next, I sold to a mid-market tech firm whose leadership team spent most of the quarter trying to pull revenue in from the next one. There were special discounts for clients, SPIFs for sellers, and lots of general begging, berating, and burning the furniture to hit some made-up number.

And “made up numbers” is the point.

Early in this company, I recall sitting in a meeting of 80 of the highest-ranking employees. The CEO and CFO kicked off the day by sharing how they intended the company to follow “The Rule of 40” to be better valued by the market. This is a rule of thumb for SaaS companies in which the revenue growth rate plus its profit margin equals or exceeds 40%.

I sat there waiting for the strategic plan to get us there—it never came—and wondered why this mature digital promotion company was holding itself to SaaS metrics.

In both companies, missed numbers eventually led to the founders’ exits. Their replacements haven’t done much better. Their remaining employees keep grinding away, struggling through cost cuts and re-orgs while their stock values decline.

Alternatives are Out There

Did you know that many excellent family-owned and otherwise private companies deliver outstanding results for decades? They might get less press because they are less in the investors’ eyes. But they have more freedom to make decisions for long-term gain.

I first encountered such a family business when I worked in the household cleaning category at Procter & Gamble. Our biggest competitor was SCJohnson: “A Family Business.” Both companies have a proud +100-year history. But my company, P&G, was publicly traded, and SCJ was private.

The difference hit us hard nearly every time we announced a product upgrade in the category. On our launch day, SCJ dropped a massive promotion, such as a Buy-One-Get-One Free (BOGO) national coupon. Consumers skipped our fancy new bottle and millions in media spending to stock up on the SCJ brands.

We at P&G could never do such a thing, as it would hit our profit margin and lead to a loss that could jeopardize the company’s quarterly profit goals. They could take a loss because they didn’t have those short-term investors to worry about.

There are plenty of other examples you might not know about. Take IKEA, which is featured in this Acquired podcast episode. IKEA has become a global juggernaut despite its founder, Ingvar Kamprad, taking zero outside investment. He built the company through its annual cash flows. Crazy, huh?

Another huge CPG company, Mars, is still privately owned. My friend, Amanda, works there and praises how the firm is truly principle-driven and values freedom for its employees. Other huge private consumer brands in very competitive industries include Lego, Bosch, and Publix.

The Big Four Accounting firms are still private. So are massive consulting firms like McKinsey, Bain, and BCG. Some pretty smart people work there, and they see a lot of different companies.

Maybe they know something…but is there more to the story?

Why? Ego

I can understand investors’ motivation, even if arbitrage is not my career or ethical path. But for many years, I wondered why many star Founder+CEOs of once-strong companies chose to put themselves under the IPO pressure.

Then I heard Starbucks founder⁷, Howard Schultz, on the Acquired podcast last summer. The entire two-hour program is a fascinating story of one of our generation’s most iconic founders and brands, but this 10-second clip about what drove his IPO decision stopped me in my tracks as I walked my dog:

“I think there was so much about being a public company that meant something to me personally, that it validated the company, it validated me, my own shame and security as a kid. So I was a driving force all along.” (1:14:36)

Kudos to Schultz for keeping it real…but this is troubling! He made a deeply personal decision. He sought external validation of his work. And he did it to overcome his childhood shame and insecurity.

This is what we’re supposed to work out in therapy, not in a public funding process!

Schultz then describes how much he wanted Goldman Sachs to take the company public because of its top-tier status.

“I had my own ego attached to this.”

Starbucks went on to have a successful IPO, and thanks to the leadership of Howard Schultz, it is a frequented store by millions of people around the world each day. His ego—his desire to prove himself to the world—was surely a significant driver of this success.

The problem is, the company can’t seem to thrive without him.

Twice, in 2008 and 2022, Schultz returned as CEO after his hand-picked successor failed to navigate successfully. And while he left the Board in 2023, his public LinkedIn post calling for leadership change led to replacing a third CEO last year.

Why does he still care? Because he loves his old company and the employees who grind it out there (pun intended). But his ego likely plays a significant role, too. He hates seeing his brand, his baby, his source of validation, turn to crap.

It’s fascinating how often iconic CEOs are forced to come back to salvage their legacies:

• Nike - Phil Knight left his CEO role in 2004, yet decided to fire his replacement two years later. He then drove out the most recent CEO in 2024.

• Apple - Steve Jobs was forced out in 1985 and returned in 1997

• Dell - Michael Dell left his CEO role in 2004 and returned to replace his successor in 2007. In 2013, he led a leveraged buyout of the company to remove it from the public markets.

Many others stayed very close in their Chairman roles over the decades. Some succeeded, others failed. Meanwhile, Walt Disney, Steve Jobs, and Herb Kelleher are trying to claw out of their graves to return and fix their once-great companies.

The combination of a ravenous investment market addicted to short-term gains and corporate lifer replacement CEOs who don’t have the same kind of passion for the business eventually leads the greatest companies to fade.

Inside the Ego

Howard may not have seen his ego issues yet, but I found another post-IPO founder whose story is insightful.

David Hersh is a multi-time technology founder and investor. In his book Reignition, he shares the journey of starting Jive Software in 2001. His investors drove him toward an IPO and pushed him to accept an outsider to take his CEO spot to look better for the public markets.

Jive went public in 2011, and from the sidelines, he watched his company “die a slow and painful death” over the following six years. Hersh describes how “the company shifted its energy from innovation to financial outcomes, bending over backward to hit financial targets in an increasingly competitive environment.” Growth fell below the magic 30% number for public companies, and the stock price tanked. In the end, Jive sold for a fraction of its earlier value to a PE firm of last resort.

“Once a raging source of purpose, community, and soul for me and many others, this company had been transformed into a slave to quarterly numbers that it failed to hit and became a loser.”

While he was no longer pulling the levers as the company declined, he still took it personally. But over the next few years, Hersh used therapy, meditation, and retreats to come to terms with the experience. Instead of pointing the finger at investors and executives who replaced him, he recognized his mistaken decisions and why he made them.

“I recognized how I had set the destructive wheels in motion. I set the wrong goals. I brought on the wrong investors, board members, and execs. I operated from a compromised position instead of a place of enlightened leadership.”

“Why? I was insecure. I made decisions that would look good to investors or peers—or that they were telling me to make—instead of considering the long-term health of the business…I was fearful.”

This sounds awful, but I love the personal growth. Through this introspective process, Hersh learned something profound about himself, making him a better business leader and human being. As I’ve written, entrepreneurship burns your ego if you let it.

And he discovered that there’s always a next play to apply his painful lessons.

Hersh has gone on to consult with and acquire multiple “stuck” VC-backed startups and continues transforming them into healthy, sustainable businesses with enlightened leadership.

I’m Guilty, Too

You don’t have to go for an IPO to see how our ego is often the enemy in entrepreneurship. My startup experience is yet another data point in this thesis, as I made many ego-driven mistakes in the past:

I got enamored with the startup mythos, including the chase to raise money and thinking I had to build a billion-dollar business.

I bought into the startup math of growth at all costs—profitability be damned.

I wanted to get a win under my belt and onto my LinkedIn profile.

I feared losing our positive momentum and seeing a decline in my net worth.

Fortunately, we recovered from my errors in time to pivot our company, get profitable, and negotiate a meaningful sale for our investors and employees.

There’s almost always an opportunity to learn from our mistakes. I tried twice to buy my company back as our acquirer suffered its post-IPO implosion. When they didn’t reply, we just started it all over again.

And now with our holding company, I get to implement fixes for my old ego-driven mistakes. Since we’re not raising money, we’re not operating under the fear of hitting a number for investors’ benefit. We do not need to sell and can think years ahead instead of quarter-to-quarter.

It feels so much better now, and I think it’s because we’re learning to build from a place of Love instead of Fear. It’s a concept that other business leaders are starting to discuss. You’ll find me writing more about this here in the months ahead.

I’m sure it’s a lifetime thrill to have that moment on the stock exchange floor and ring the bell with your team. I think it’s a lot more fun to build a business that has a much longer life than what most IPOs see. But it can take living and learning to get there.

[Special thanks to Joe Hovde for feedback on a draft of this post and his writing on several post-IPO bust examples. Go subscribe to his Substack, Residual Thoughts, for short, fun, data-centric observations about business, technology, and psychology.]

If you like my writing, feel free to click the ❤️ or 🔄 button on this post so more people can discover it on Substack 🙏

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How we might work together…

• Fleet is our holding company for services businesses. We invest in leaders ready to start their own companies (we also do some M&A). If this might be you, hit my Office Hours link.

• A2 Influence is our content development agency that helps some of the biggest brands and retailers create and distribute authentic content at scale, including social+influencer. CEO Rob Reinfeld would love to share our approach.

• Revelin is our consulting practice that helps with revenue alignment, growth management, and other RevOps functions. CEO Jess Shuman is standing by to share a no-cost assessment of your business.

• Feel free to schedule a chat during my Office Hours to discuss questions, feedback, networking, or any other topic. Seriously, any topic! You can also reach me on LinkedIn or by email.

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BONUS: Cool Content of the Week

A little something I found meaningful. You might agree…

Talking Billions podcast with Ashwath Damodoran

One regret from my MBA program at NYU/Stern: I never got to take a class with Ashwath Damodoran. He was a young, rising-star Finance professor known for bringing real-world energy into the classroom. Alas, as a Marketing major, there was no way I could get into even his intro course.

So I was excited to finally spend an hour with him…on the Talking Billions podcast. And, yeah, he sure sounds worth the hype. In this episode, Damordoran discusses his journey in corporate finance and valuation, reflecting on the lessons learned from financial crises and the importance of understanding the corporate life cycle.

His comments span far across the markets into his personal life and the larger world. It’s clear that he still loves learning and teaching. And I’m still envious of the classes of Stern students that get to hear him in person each week.

1. To help you on your way, you can pay $25,000 to celebrate your Series A, B, or C funding on the NASDAQ Times Square billboard for a few minutes.

2. https://www.skadden.com/-/media/files/publications/2023/06/de_spac_transaction_trends_in_2023.pdf?rev=a0def9cfccae4a3fa2b31b3efc20e548

3. https://site.warrington.ufl.edu/ritter/files/IPOs-longrun.pdf

4. https://news.crunchbase.com/public/ipo/2024-winners-losers-tech-ai-robotics-reddit-astera/?utm_source=chatgpt.com

5. Here’s how that went for “Rick”: His $200 million SPAC went public in July 2021. As the two-year deadline to buy something got near, the company changed its name and fund focus away from e-commerce to “an investment opportunity in any business or industry.” Finally, it announced its plans to buy a medical device company, despite its fund never having invested in a medical device product. Alas, 95.1% of shares had been redeemed by this time, meaning they all asked for and got their money back because they lost confidence that the fund would buy something worthy. That meant the SPAC didn’t have enough cash to close the acquisition, and the SPAC dissolved. The fund probably lost $6 million in fees alone. I don’t know the reputation cost to Rick and his fund. But I think we score one for Karma here.

6. A friend asked, “Is this legal?” My research suggests a CEO can request but cannot prevent or coerce employees.

7. Not really the founder, but he’s the guy who first turned the company into a chain.