Reid Hoffman | M&A or IPO? | Summary and Q&A

TL;DR

Founders should focus on building a company for IPO rather than acquisition, as the strategic value and potential long-term benefits far outweigh the risks and efforts involved in the process.

Key Insights

• ✋ Starting a company with the intent to sell is riskier than building it for IPO, as the potential for long-term value and strategic impact is significantly higher.
• 🥺 Strategic value can drive a company's success and potentially lead to acquisition, especially if the company offers unique technology, data sets, or customer engagement.
• 🤪 Economic value and clear profitability plans are crucial for a successful IPO, and companies should evaluate their ability to generate economic value before going public.
• 🍭 Companies should carefully consider the timing of their IPO and assess whether it aligns with their overall strategy and market conditions.
• 🎟️ Selling a company requires careful consideration of the strategic value, potential acquirers, and the impact on employees, customers, and the company's mission.
• 😤 The CEO and senior team's role in acquisition discussions varies depending on the acquirer's strategic goals and the value they see in retaining the existing management.
• 🖐️ The S1 document plays a critical role in telling a company's story during the IPO process, and accurately identifying risk factors is essential for gaining investor trust.

Transcript

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Questions & Answers

Q: Should all companies start with the goal of an IPO?

Starting a company with the goal of an IPO is strategically more beneficial than aiming for acquisition. While only a small percentage of companies succeed in going public, the potential long-term benefits and value far outweigh the risks and efforts involved in building a company for IPO.

Q: When should companies consider selling?

Companies should consider selling when their strategic value outweighs their ability to generate economic value or when the risk factors and uncertainties in the business make it more beneficial to pivot and sell. Selling should be seen as a strategic decision based on the company's unique circumstances and potential for acquisition.

Q: How do the public markets reflect the current economy?

The public markets tend to be optimistic and focused on the government's commitment to avoiding a great depression by implementing stimulus measures. However, it's important to consider the impact of the mishandled pandemic response and other factors that may affect the economy. The market may not fully reflect the challenges and uncertainties faced by businesses.

Q: How does the IPO process impact the company's product roadmap, management, and recruiting?

Going through the IPO process may require companies to allocate additional resources and focus on preparing the necessary documentation and complying with regulatory requirements. The management team may need to balance the demands of going public with the company's overall strategy. Recruiting may also be impacted, as the company may attract top talent with the potential for stock options and growth opportunities.

Summary

In this video, Reid Hoffman and Chris Yeh discuss whether founders should seek acquisition or an initial public offering (IPO). They explore the risks and benefits of each option and provide insights into the strategic considerations for founders. They emphasize that companies should not be built with the intent to sell, but rather should focus on building long-term strategic and economic value.

Questions & Answers

Q: Do all companies start with the goal of an IPO?

Starting a company with the intent to go public requires the same level of effort, risk, and resources as starting with the goal of an acquisition. Although only a small percentage of companies ultimately go public, the potential outcome in terms of value is much higher with an IPO. Therefore, strategically, it rarely makes sense to start a company with the intent to sell.

Q: Under what circumstances might starting a company with the goal of selling be feasible?

There are two possible exceptions. The first is when a small team identifies a critical need that major tech giants are likely to have, and they can quickly build a technology solution for it. However, this bet comes with significant risks, as the market and technology landscape may change, and the giants may already have their own internal solutions. The second exception is when the company's idea and product have significant strategic value but uncertain economic value. In such cases, the company may be acquired for its strategic value, such as customer acquisition, user engagement, data sets, or technology.

Q: Is it harder to build a company to sell compared to building it for an IPO?

Building a company to sell is often considered riskier and more challenging than building it with the intention of an IPO. Going public requires meeting specific criteria, such as business momentum, revenue acceleration, and market share, which are well-defined and understood. On the other hand, potential buyers may have strategic considerations that are not fully known to the founders. Therefore, building a company to sell requires a deep understanding of the potential buyers' needs and proactive efforts to create strategic value.

Q: How should founders weigh the IPO option against the acquisition option?

Founders should focus on winning the market and building strategic and economic value rather than solely focusing on selling the company. The goal should be to become a valuable and attractive entity, whether through acquisition or IPO. By achieving success in the market, a company becomes valuable both strategically and economically, making it attractive to potential buyers and the public markets. The decision should be based on the unique circumstances and potential outcomes for the specific company.

Q: When should founders consider selling the company?

Selling the company should be considered as a serious alternative only in certain circumstances. If the economic model of the company becomes uncertain or if there is a high-value acquisition offer, it might make sense to pivot towards selling. However, founders should generally stay focused on building value and strategically positioning the company. Selling should be seen as a plan B rather than the initial plan, and founders should carefully evaluate the risk factors and potential outcomes before making such a decision.

Q: Why do venture capitalists ask about exit strategies?

Venture capitalists are interested in understanding a company's potential range of outcomes, including potential exits. While companies are not built solely to be sold, considering alternative exit strategies can help evaluate the risk profile and potential returns. Exit strategy discussions also allow venture capitalists to assess the founders' rationality and strategic thinking. It is crucial for founders to demonstrate that they have a plan for significant growth, but they are also open to alternative possibilities depending on market conditions and strategic value.

Q: How do public markets reflect the current economy?

Public markets reflect the belief that governments are committed to avoiding a Great Depression by providing stimulus to businesses. However, the markets fail to account for the negative impact of a mishandled pandemic response. The uncertainty caused by the pandemic and government responses can lead to a drop in business investments and growth. While the markets may seem overly enthusiastic, long-term economic factors should be evaluated to determine the right timing for an IPO.

Q: Should companies consider going public during the current economic situation?

The decision to go public should align with the company's strategy and context. It could be a good time to go public if the company's story is differentiated and investors are willing to bet on the future. Going public can provide public equity value, differentiate the company, and lay the foundation for future growth. However, it is essential to consider the potential volatility and uncertainties in the market and evaluate whether going public aligns with the company's long-term goals.

Q: Is the IPO the end goal for entrepreneurs?

No, the IPO should be seen as a means to an end rather than the end goal itself. Entrepreneurs should view the IPO as a tool to achieve strategic objectives, such as marketing the company, supporting M&A strategies, or rewarding employees. Each milestone in a company's growth journey opens up new opportunities and challenges, requiring different tools and organizational dynamics. The IPO is part of the company's ongoing evolution, rather than the end of its story.

Q: How important is the S1 document for a company going public?

The S1 document is crucial for encapsulating the company's story in a way that resonates with potential investors. It offers an opportunity to accurately identify and communicate the company's risk factors, strategy, and financials. Companies that have successful IPOs often have well-crafted S1 documents that effectively convey their value proposition. However, a poorly prepared S1 document can have negative consequences, as seen in cases like WeWork. The S1 process allows companies to refine their story and attract investors who understand and believe in their vision.

Summary & Key Takeaways

• It is strategically more advantageous for companies to start with the goal of an IPO rather than aiming for acquisition, as the long-term benefits and potential value of going public are much higher.

• Starting a company with the intent to sell is risky, as there are multiple uncertainties and factors to consider, including the market demand, competition, and the ability to generate economic value.

• Building a company with strategic value can pave the way for future success, whether through acquisition or IPO, especially if the company offers unique technology, data sets, customer engagement, or other strategic advantages.

• Companies should carefully evaluate their economic value and potential for profitability when considering an IPO, as having a clear economic value story is essential for going public.