I have seen at least a dozen of my smartest friends refer to Bill Gurley’s terrific post this week before I actually got around to reading it – which I finally did.
My first thought upon reading it was of some recent discussions on StockTwits as well as among my Enterprise Irregulars colleagues, particularly in regard to Salesforce.com ($CRM) – up a mere 18% TODAY.
There’s no doubt Salesforce.com has a rich valuation, but if you agree with Gurley’s arguments, you can also argue they’ve earned it. He specifically mentions Salesforce.com CEO Marc Benioff alongside Amazon.com CEO Jeff Bezos and Netflix’s Reed Hastings as examples of entrepreneurs who both took the long view and changed the game in their industries – and have been amply rewarded for it.
It’s also notable – and probably not a coincidence – that all 3 CEOs are founders.
All 3 companies are regularly referred to as ‘wildly’ and ‘insanely’ overvalued, but all 3 companies continue to out-innovate and out-execute their many competitors. And up they continue to go.
I’ve always been a ‘value guy’ and I have a very hard time buying richly-valued stocks. I don’t own shares of any of these companies right now – which is unfortunate for me.
Because it’s pretty clear, despite the doom and gloom that continues to pervade the tech media and investment community, that things are turning positive, and opportunities do exist to make money – a lot of it.
Today’s market is certainly not a ’99 market when just about ANY company could go public and, at least for a short while, enjoy a rich valuation. Today’s winners are, without question, much more concentrated – and under much more scrutiny (a good thing).
Nothing grows to the sky and nothing lasts forever – Cisco and Microsoft were both ‘that company that could do no wrong’ at one time – for long periods of time. So were Google and Apple, and perhaps they still are – or perhaps not.
Tech is a dynamic industry, and those of us who’ve worked in it long enough wouldn’t have it any other way. The continuous reinvention that drives the business hasn’t gone away – it’s just moved around a bit. If you’re smart enough or lucky enough to be in the place it moves to, the returns are arguably as good as – or better than – they’ve ever been.
If you could travel back in time to the early 1990’s and ask Silicon Valley’s top entrepreneurs and private company executives about their long-term career ambitions, you would hear a constant theme – they all wanted to be part of an Initial Public Offering (IPO). Back then, taking a company public, either as a CEO, CFO, or founder, held an allure similar to that of a young athlete dreaming of making it in the major leagues. Clearly, not everyone was able to go public, but that of course added to appeal. Everyone still wanted to go public. They all dreamed of playing on the business world’s biggest business stage.
A great deal has changed since then. First, we lived through the peculiar time now known as the Dot-com bubble, where the elite requirements for going public were greatly reduced. This was followed by a period of heavy regulation where many aspiring startups felt as if they were absorbing the burden of sins committed by the likes of Enron and WorldCom, two companies that are far away from Silicon Valley. If you believe what you read, we now live in a world where young entrepreneurs have a more cynical view of the IPO and being public in general. It is common today to read a phrase like “You don’t have to go public early to provide liquidity to early investors or employees.” It is critical to consider just how far away “don’t have to” is from “want to” or “dream of”.
One recent argument knocking the IPO is as follows: Wall Street is too short-term focused, and that if you want to run your company for the long-term you should remain private. There are three great reasons that this “can’t focus on the long term” argument falls short — Jeff Bezos, Marc Benioff, and Reed Hastings. All three of these amazing entrepreneurs turned CEOs took their company public on a standard IPO time frame. They also all three conveyed to Wall Street that they would postpone short-term earnings results in order to chase a greater long-term objectives and ambitions. The intelligent mutual fund investors that were swayed by their convincing arguments (there were many) were handsomely rewarded. Furthermore, Bezos, Benioff, and Hastings all three used “being public” as a bully-pulpit to tell their version of their industry’s story, thereby aiding their advantage. If you are unconvinced go ask Steve Riggio, Tom Siebel, or Blockbuster CEO Jim Keyes.
We should also consider DataDomain, 3Par, and Arcsight, all companies with remarkable sell-side M&A transactions who went public BEFORE engaging in an M&A transaction. Being public is a wonderful way to establish a baseline valuation in an eventual corporate sale. There is no chance someone would make an offer at or below the current market price, as the expectation is to pay a market premium. And because the BOD has a very high duty in terms of maximizing shareholder value, these deals are often seen by multiple bidders and therefore more likely to be competitive than a private transaction. Lastly, and not to be ignored, public company sales have zero escrow provisions. These escrows typically put at risk 10-15% of the transaction value when a private company is acquired. Being public before you get acquired can be extremely valuable.