By Punit Dhillon
You’re prepared to launch your start-up company, but now you’re faced with a difficult decision: private or public? First, ask yourself, why go public? Is it for investor returns, exit for founders, access to capital, M&A, or something else? The only companies achieving and benefiting from IPOs have actual revenue or are very close to revenue. They receive analyst coverage and media attention and, if successful, reap the rewards. Most others will be penalized by public markets for not hitting targets, needing to raise further cash, low trading volumes, product failures, down-markets, or recessionary influences. If a nonrevenue-generating company has market support in the form of investors and analysts, it is much more likely to continue to have its valuations supported.
On the other hand, private companies are somewhat immune to down-markets if they do not need to raise further financing. It is only when financing is to occur that they need to deal with valuation concerns.
A key driver for the decision to go public is the availability of funding sources and management’s experience and relationships. The VC model for funding is relevant for those companies that have the luxury of longer timelines, have a limited operating history, or have not yet reached a point where the fundamentals of the company allow for the best economics and intrinsic valuation to be realized.
A Decision Based On Multiple Factors
Many successful companies were formed from angel investors, seed funding, and strong VC backing. We have all seen IPOs for strange products and public companies that have failed, yet there are hidden gems that continue to fly under the radar of the public markets, become larger, and build shareholder value — but in a private company setting until forced to go public for regulatory reasons. With an experienced management team familiar with the capital markets, seeking a public listing through an IPO or reverse merger is beneficial for broader visibility and the ability to reach potential investors. Small companies that choose to go public need strong banking endorsement from a firm interested in the company’s needs and cannot be motivated solely by the economics of a megamillion-dollar IPO that leaves clients hanging with no post-IPO support. If the base is not there, it is a steep and risky hill to climb — in which case, staying private with strong investor backing is needed until the company is ready to go public. Public companies are subjected to many complexities such as absolute transparency, more shareholders to deal with, more compliance and regulatory guidance, more costs, and more scrutiny. You better be ready to compete with different stakes and more eyes watching every move.
A company should not go public if it has no viable reason to do so: Investor and founder liquidity should not be the sole reason. It either needs revenue or very good market support, or it will suffer.
Before going public, a company needs a clear business strategy and exit opportunity, whether it is product commercialization, M&A, or out-licensing. Then it needs to be adaptable to market-driven conditions. If a company does not have these figured out, it will have a tough time being public because it is not adequately prepared for the expectations of a broader base of shareholders.
Despite these caveats, hundreds of companies will go public with an early-stage clinical development plan, including outliers. The underlying technology and product will drive this decision, while the board of directors and management team must ensure the successful execution of the business plan.
Another consideration is that IPOs spur job creation and are thus good for the country. Unfortunately, the extensive attention to new regulations for public companies has thwarted the public company market, from more than 8,500 companies in 1999 to a little over 5,000 companies in 2011. Meanwhile, foreign markets have now surpassed the United States in the number of public companies. There are many macroeconomic issues here, but the bottom line is that when answering the tough question of “where can stimulation of growth begin?” I believe the public sector will play a fundamental role for economic recovery in the U.S. market, since it is one of the largest in the world.
In summary, the decision of private vs. public for your start-up depends on factors that will vary widely from case to case. A serious appraisal of how your product will be valued by shareholders today is necessary before deciding to go the latter route.
Punit Dhillon is president and CEO of OncoSec Medical Inc., a biotechnology company developing advanced-stage Oncology Medical System ElectroOncology therapies to treat skin cancer and other solid tumor cancers.