For High Tech Companies, Going Public Sucks | Epicenter | Wired.com

For High Tech Companies, Going Public Sucks | Epicenter | Wired.com

For High Tech Companies, Going Public Sucks

• By Felix Salmon
• Email Author
• March 20, 2012 | 
• 1:30 pm | 
• Categories: IPOs, Miscellaneous

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Mark Zuckerberg, September 2011
Illustration: Jesse Lenz

When Facebook goes public this year, it will raise at least $5 billion, making it the biggest Internet IPO the world has ever seen. The day it debuts on the stock exchange, Facebook will be worth more than General Motors, the New York Times Company, and Sprint Nextel combined. The next morning, Mark Zuckerberg’s smiling face will appear on the front page of newspapers around the world.

But don’t be surprised if that smile looks like the forced grin of someone dragged to the altar. Truth be told, Zuckerberg is going public not because he wants to but because SEC rules have forced his hand. Once a company takes on more than 500 shareholders—a number that Facebook easily surpasses if you include all the investors and employees who have bought or received shares over the years—it must register its stock. That means shareholders can trade it in the OTC (over the counter) markets, out of the company’s control and without its consent or cooperation. No high-profile business wants its shares to be traded in that opaque purgatory of low valuations.
And so, like a hapless groom, Zuckerberg is about to become just one part of an institution much bigger than himself—a publicly listed limited-liability joint-stock company. The visionary who turned down a billion-dollar offer to cash out at the age of 22, the imperial CEO with complete control over the company he built from scratch, will now run a company owned by hordes of shareholders from all over the world.
Zuckerberg clearly does not relish this prospect, and he has taken great pains to preserve his iron grip on Facebook. When the company goes public, Zuckerberg will still control 56.9 percent of the votes, will be free to single-handedly appoint directors, and will even be able to name his successor. Technically, Facebook may be going public, but Zuckerberg will continue to run it like his own privately held concern.

5,000,000,000,000

There’s another option: Skip the VC cash. That may sound like suicide, but a recent study showed that most fast-growing US companies take no venture funding at all.

Thanks to those safeguards, Facebook will probably weather its IPO just fine. But when the world’s most successful young tech entrepreneur does everything in his power to minimize the impact of public ownership, it makes one thing clear: The IPO model is broken.
Going public might be good for a company’s investors and employees, but it is usually bad for the company itself. It forces CEOs to focus on short-term stock fluctuations at the expense of long-term growth. It wrests control from the founders and gives it to thousands of faceless shareholders.
For hugely successful mega-businesses—Apple, Facebook, Google—going public has its benefits. Public companies enjoy cachet, tax advantages, and access to more and better financing options. But for many young companies, the drive to go public results in a death spiral of unsustainable growth.
It doesn’t have to be this way. There are better options for financing technology companies. But first we have to kill the tech industry’s senseless addiction to the IPO.