Thu June 28, 2012
Going Public Is A Hassle
Originally published on Wed July 11, 2012 2:09 pm
Here's a classic story of how a multimillion-dollar company gets started.
A young guy named Seung Bak is on a trip to China. He gets back to his hotel room late one night and turns on the TV.
"I'm flipping through channels, and in the middle of China they are showing Korean dramas all around the clock," Bak says.
It turns out Korean soap operas — like, say, Bachelor's Vegetable Store, about a bunch of sexy guys selling organic produce — are this global phenomenon.
"I went to a bachelor party in Cancun, and they are airing Korean dramas dubbed into Spanish," Bak says.
And it hit him. He was going to start a website to bring all these crazy soap operas from around the world to Americans.
The site is called Drama Fever. It has 2 million viewers and has raised millions of dollars from investors.
In the classic startup story, Bak would would take his company public — sell shares in an initial public offering, ring the bell at the stock exchange, have a big party. But Bak, like lots of young entrepreneurs these days, doesn't want Drama Fever to go public.
Jai Shekhawat, the head of a company called Fieldglass, feels the same way.
"People don't really see it as a badge of honor anymore," he says. "It's a hassle."
Fieldglass is a high-tech firm that helps other companies find workers. He gets calls all the time from investment bankers telling him he should go public. But he says there are three big reasons he's not interested:
1. Too many rules. Thanks to corporate scandals at places like Enron and WorldCom, there are a lot of new rules to protect shareholders. Companies that go public have to revamp the way they do their accounting. For a small firm, that can be a big burden.
2. Relentless pressure from shareholders. Investors demand constant growth, quarter after quarter after quarter. If you disappoint them too many times, you wind up at reason No. 3 not to go public.
3. You could wind up an orphan. A company becomes orphaned when institutional investors bolt, investment analysts stop following the company, and the stock plunges in value. It's a sad end to the IPO dream.
There are, of course, plenty of companies that still do go public.
Spencer Rascoff, who founded the real estate site Zillow, points to tech giants like Apple and Google. "It would be impossible to accomplish what they wanted to accomplish if they had stayed private," he says.
Rascoff took his company public last year. He says a lot of tech CEOs are like bachelors who swear they will never get married — and then, when the time is right, they commit.
RENEE MONTAGNE, HOST:
It's been a discouraging few months for American companies that want to go public. The number of initial offerings in the U.S. is down 41 percent compared to the same time last year. Analysts are calling it the Facebook Freeze: No company wants to see their big debut in the stock market go as badly as it went for Facebook. But the numbers also show that IPOs were going out of fashion, even before Facebook tanked.
Robert Smith, from our Planet Money Team, explains why entrepreneurs have different dreams these days.
ROBERT SMITH, BYLINE: Here's a classic story of how a multi-million-dollar company gets started. There was a young guy. His name was Seung Bak, and he was on a trip to China. And he gets back to his hotel room late one night. He turns on the TV.
SEUNG BAK: And I'm flipping through channels and in the middle of China they're showing Korean dramas, all around the clock, right?
SMITH: Korean soap operas like this one called "Bachelors' Vegetable Store," about a bunch of sexy guys selling organic produce to older women.
(SOUNDBITE OF TV SHOW, "BACHELORS' VEGETABLE STORE")
UNIDENTIFIED MAN: (As character) So, you know me? I'm Lo(ph).
SMITH: Seung Bak is Korean-American, but he never thought much about these soap operas until he noticed they were everywhere.
BAK: Like I went to a bachelor party in Cancun and, I mean, they're airing Korean dramas dubbed in Spanish.
SMITH: And it hit him. He was going to start a website to bring all these crazy soap operas from around the world to America. The site is called Drama Fever. They now have two million viewers. Bak and his co-founder raised a bunch of money from private investors. But this is where the old start-up has a completely different ending. Seung Bak doesn't want Drama Fever to go public.
BAK: Maybe it's just me personally, that stuff to me is all vanity, and it's just not that important.
SMITH: An IPO used to be the final step for a fast-growing company. Everyone wanted to be Microsoft or Apple or Google, sell shares to thousands of people, make a billion dollars, throw a huge party at your headquarters.
UNIDENTIFIED WOMAN #1: All right everyone, are you ready?
SMITH: This is the scene outside the Facebook offices last month. There was hope in the markets that a huge successful IPO could tempt other high-tech firms to also go public. And even as Mark Zuckerberg rang that bell to open trading...
(SOUNDBITE OF BELL RINGING)
SMITH: ...other CEOs were thinking, not me.
JAI SHEKHAWAT: People don't really see it as a badge of honor anymore. It's a hassle.
SMITH: Jai Shekhawat is the head of a private company called Fieldglass. It's a high-tech firm that helps other companies find and manage workers, and he gets these calls all the time from investment bankers who want him to go public, but he says there are three big reasons that tech firms like his aren't biting.
SHEKHAWAT: Well, the first is that there's a tremendous compliance cost to going public.
SMITH: Thanks to corporate scandals at places like Enron and WorldCom, there are a lot of new rules to protect shareholders. Companies that go public have to revamp the whole way they do their accounting. The second reason to avoid an IPO, Shekhawat says, is that the stock market demands constant growth in revenues. It's relentless. And if you start to disappoint your shareholders too many times, then you have the final reason to avoid going public.
SHEKHAWAT: Then you are orphaned.
SMITH: Orphaned. A company can become orphaned when its stock plunges in value. Investment analysts stop talking about your company. Then no one wants to buy or sell the stock. It's a very sad ending to the IPO story.
SHEKHAWAT: Yes. It is sad, and you don't even get visitors. There's no relatives either.
SPENCER RASCOFF: There is a general attitude that the cool kids sell their companies rather than going public.
SMITH: Spencer Rascoff did the cool thing a few years ago. He sold his Internet travel site Hotwire to Expedia. But Rascoff has come around to a different view of the public company. When he started his next business, Zillow, a real estate information site, Rascoff had bigger dreams.
RASCOFF: Look at other giant technology companies. Look at what Apple has accomplished, or Google, or Microsoft. It would be impossible for those companies to have accomplished what they have accomplished, had they stayed private.
SMITH: And so Rascoff bucked the trend. He took Zillow public last year and he doesn't regret it, and he's not too worried that the IPO or the public company will die off any time soon. Rascoff says that a lot of tech CEOs are like bachelors who swear they will never get married, that it's too much of a hassle. And then the next thing you know, they're walking down the aisle.
Robert Smith, NPR News, New York.
MONTAGNE: We are going to take a break and then turn to the Supreme Court decision on the health care law. This is NPR News. Transcript provided by NPR, Copyright National Public Radio.