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When private capital is available in sufficient quantities to satisfy liquidity, why go IPO?
Inspired by Steve Blank’s post today about the “lost decade” of IPO’s, I’d like to make some predictions. Let me be clear: Steve is the historian. His posts are born of tremendous research into the secret history of Silicon Valley, and if you haven’t read those essays, you should. By contrast, what I’m about to say is pure speculation.
The fact that IPO’s are disappearing makes intuitive sense to me. And the fact that the effects of this IPO vanishing act are being felt first and foremost in the software business also makes sense to me. In fact, I believe that the software business is the canary in the coal mine: increasingly, all businesses are going to look more and more like software businesses.
My belief is that the root cause of the IPO shortage is that successful startup companies cannot find productive ways to invest large amounts of money to scale anymore. For software companies especially, scaling distribution and development is comparatively cheap. The old ways aren’t working. Large capital investments simply don’t have the ROI they used to. The world is changing too fast. New products become commoditized too fast. Increasingly, the only profitable thing to invest in is innovation, which means investing in people. And we don’t yet know how to do that on a consistent, scalable, basis.
Ironically, the VC’s who depend on IPO’s and the CEO’s who are supposed to be creating them are struggling with the same basic problem. They do not have a comprehensive theory of entrepreneurship that allows them to consistently invest in innovation that can create long-term value.
The only way I can see to achieve sustained growth is to create an innovation factory. The modern CEO needs to build an organization that is truly diversified: it is continuously investing in successful sustaining innovation and disruptive innovation. Such an organization should be able to deploy large amounts of capital effectively, by investing in its people. But this is a very different kind of diversification from the old-school GE model. We can’t just diversify across industries or geographies. We can’t even rely on a suite of line-extension products. We have to continually invent new categories of products, new platforms, and new business models – all extremely risky bets. Oh, and by the way, we still have to execute flawlessly. (Even the smallest flaw with an antenna can derail the whole train.)
Today’s management reality is just plain harder than that of the past. General managers need to know how to manage the execution-oriented "twentieth century" general managers that work for them. But they also need to know how to manage the new entrepreneurial managers that, increasingly, are essential to their growth. In other words, the old “manager vs. entrepreneur” dichotomy is breaking down. You cannot be a competent general manager in today’s economy if you do not understand entrepreneurship.
We are living in a transitional moment. The last of the old-school IPO companies are behind us (at least in software), and yet we have not yet witnessed the new-style IPO companies. Despite Google’s reputation as an innovative company, they seem to me to be counted as one of the last of the old breed. Their entrepreneurial successes are mostly to be found outside the organization, in the form of ex-Googlers who became entrepreneurs. Their internal “startup” projects seem, at least to my eye, to have a success rate only marginally higher than Microsoft’s (perhaps with Android – an acqusition – as a major exception). Certainly a large proportion of them end in failure.
The new breed of company currently finds itself satisfied with private capital, and has no need for an IPO. I think Zynga and other games companies may be the earliest exemplars for us to look at. Game companies naturally lend themselves to a “studio” model, with semi-autonomous teams building out their own franchise of sequels and spin-offs. From public reports, it seems like Zynga has really mastered a formula for innovating repeatedly and relentlessly across segments, platforms, and genres. And there are plenty of imitators and fast followers on their way. Will that cohort of companies need an IPO?
When private capital is available in sufficient quantities to satisfy investor and founder liquidity needs, why go IPO? The only reason I can think of is when you need dramatically more capital to grow your business, at a magnitude only available on the public markets and therefore worth the loss of control that going public entails. Our leading crop of pre-IPO web companies apparently do not need that much capital – yet.
It’s a debatable proposition why they don’t need IPO levels of cash. I freely admit that I have no inside information, no unique insight into what they are thinking. But I am nonetheless confident in my prediction: they don’t yet have the ability to manage an innovation factory at that scale. That’s not a criticism; nobody knows how – yet.
We need a new generation of managers trained in a comprehensive management theory of entrepreneurship. Comprehensive means it has to address all aspects of a startups life: marketing and product development, especially. It has to address all stages of startup growth and development – especially including the evolution into a true innovation factory. Tomorrow’s managers will need to know how to build a learning organization (where progress is measured by validated learning) and an execution organization (where progress is measured according to traditional value streams). They will need to know how to combine those organizations into one coherent whole.
I believe that the Lean Startup is the first such comprehensive entrepreneurship theory. But these are still early days. We have much work to do. We face problems today that would have bewildered the earliest management theorists. Their struggle was to use management to create enough productivity to feed, clothe, and house the world. Our civilization has excess capacity everywhere. We can build anything we can imagine. But the ranks of highly educated unemployed and the abysmal failure rates of new products both speak to the same question that needs answering: not, “can it be built?” but rather, “should it be built?”
The sum total of all we know about entrepreneurship is just the tip of the iceberg. We need to be disciplined, to study what works scientifically, and – above all - to introduce scientific methods into the practice of entrepreneurship itself.
When we master that, I think we’ll know what to do with IPO’s again. At least, that's my speculation. In the meantime, it’s going to be fun.
(Image source: rlv.zcache)
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