Public and private tech companies come with different benefits and challenges, which must be weighed by leaders when determining the ideal path to take for their enterprise.
If you’ve been following news and events in the tech and the business world, you might be aware of the infamous tweet by Tesla founder and CEO Elon Musk in early August about taking the company private. The sudden disclosure has sent both the tech and business communities into a frenzy of ‘will he, won’t he’ speculation, and might have even made some tech entrepreneurs question the fate of their tech startups. While public companies like Tesla are considering going private, many promising private tech companies, or unicorns, are preparing for their IPOs, which has left many ambitious entrepreneurs confused as to which path to take.
Choosing between private and public funding is not as straightforward as it may seem to outsiders, especially for tech companies or companies grounded in innovation, such as Uber, Spotify, Lyft, or Snap, as the dilemma lies in having to choose between financial sustainability and innovative liberty.
Comparing public and private tech companies
Public companies or publicly traded companies are enterprises that are funded by a large number of investors who own shares in the company. The investors are represented by a board of directors, who guide business decisions that are made by the CEO in a way that ensures the stability of the business and subjects the investors’ money to minimal risk. Private companies are usually headed by an individual or a team of individuals who make all the key decisions. When it comes to private tech companies, it is these founding individuals who set both, the business and technological visions, and devise plans to achieve these visions. Thus, depending on whether a company is publicly or privately funded, it enjoys more of either innovative freedom or capital influx.
Investment
The primary reason companies go public is to secure large amounts of capital to fund business expansion. In addition to achieving financial adequacy, public funding also serves the purpose of mitigating individual losses, as the risk of loss gets divided among a large number of stakeholders.
Remember, not all companies that hold an IPO and go public are guaranteed ‘unlimited’ financial power and are just as likely to fail, if not more than the private players. This is especially true if the public limited companies are not ready to make a jump and scale up to a public corporation. An example of a company that went public too soon and failed is Webvan, an online groceries delivery platform that went public in 1999. Although Webvan raised a healthy amount, encouraged by its reception in the IPO, it attempted to expand too quickly and ended up being liquidated in 2001 due to unsustainable losses after investing heavily in state-of-the-art facilities and expanding its service capacity. The example stated shows that despite having a radically innovative and popular idea, going public can be a risky affair. However, there are many successful instances of tech companies going public too. Thanks for the investment! Going public also enables companies to expand by acquiring competitors and maximizing their market share, an option not available to private companies. A timely boost in the capital can launch a promising tech company into the market stratosphere and give it the momentum to establish leadership. One of the best examples of going public at the opportune moment is that of Apple, which is now the most profitable company in the world.
Innovation
Although Apple has sustained its innovative streak and has continued to lead the global tech market, it hasn’t been without any hurdles. Following its record-breaking IPO, the company went through a phase of change and turmoil, which culminated in the famous founder Steve Jobs’ exit from the company. And a similar situation may arise in most innovative, private tech companies when they go public, as the liberty to innovate gets traded for more capital investment.
Since it is the board’s and the director’s duty to safeguard the investors’ best interests, they attempt to make decisions that minimize risks and maximize stable and steady growth, which may stifle the creativity that led to the emergence of the enterprise. Private tech companies that are usually funded by venture capitalists, mostly have greater control over their finances, as well as, their research and development initiatives.
The most hyped private tech companies usually achieve the much valued ‘unicorn’ status due to the innovative disruption that they create by essentially gambling on a previously untested idea. When these companies go public, they may lose their ability to take risks that can threaten the financial sustainability of the organization, leading to a catch-22 situation.
Finding the right way forward for your tech company
Knowing your company’s long-term vision, its current operational status, and its financial health is key to determining the right source of funding. If your business is highly ambitious and strongly founded on unrestrained innovation, securing capital from venture capitalists who are aligned with your vision may seem the ideal way forward. Going or staying private will enable you to exercise better control over your resources and allow you to be free of any restrictions typically imposed by investors. SpaceX is an example of a private enterprise that operates with complete detachment from mainstream investors to focus on its ambitious mission of sustainable space exploration and travel.
Going public may also not be a priority if you are having a hard time handling the day-to-day operations of your company. During the early stages of a company’s growth, it is essential to focus on creating value, maintaining operations, improving your offerings, and broadening the customer base. Planning an IPO and publicly trading your company will require a lot of paperwork and compliance with legal procedures that may hog your limited bandwidth, especially if you are already short on personnel.
Staying private is not a bad option if you have enough capital to innovate and improve your product to achieve profitability and stability. Once stability is achieved, expansion can commence, possibly by inviting public funding preceded by an IPO. Achieving profitability will ensure a successful IPO and can help your company reach a sizeable market capitalization value. Also, building momentum through successful operation will help you win the trust of your board and investors, allowing you enough freedom to direct your company as envisioned.
Going public is an important milestone in most companies’ development. Even though major companies like Spotify and Uber plan to go public, the number of companies staying private is still substantial. With an increase in the number of venture capital firms and high net-worth individuals who are willing to invest in promising businesses, the time has never been better for private tech companies to stay private. Regardless of what you choose to do, planning a timeline and a roadmap for growth and expansion, and timing the transition well will ensure the best results for all tech companies.
