The IPO Sweet Spot

I noticed some very interesting research this weekend on the optimal IPO timing sweetspot done by Chris Lochhead and his group at Play Bigger via a tweet from Bill Gurley.

Chris is a very talented marketing exec turned coach. I had the good fortune to watch him work from my venture investor chair as he guided Successfactors’ transition from a Human Capital Management player to the leader in Business Execution. This re-framing helped the company become more strategic, garner much larger deals, and ultimately achieve a $3.4Bn acquisition from SAP.

In Chris’ recent research on “the IPO Sweetspot” which was elaborated on by HBR, Play Bigger identifies that companies who have the most successful IPOs, as measured by after-market performance, tend to go public somewhere between 6.5 to 10.5 years from founding. Splitting category evolution into three buckets – define, develop and dominate, the superior post-IPO companies tend to come out of the “develop” phase, after they’ve emerged from a fragmented market definition process but before they’ve achieved market share dominance, with growth inevitably leveling off. Most companies hit this “develop” phase somewhere between 6.5 – 10.5 years into their lifecycle.

This makes good sense to me and jibes with a post I wrote a while ago on the three things a company MUST have before going public – predictability/visibily, no single point of failure AND a large enough market opportunity that 3-5x growth from the time of IPO (without changing one’s business meaningfully) is sensible. This third point is what Play Bigger calls “category design.” Founder’s have a lot on their plates, but one of their most important jobs is to become a ninja category designer, making sure they’ve built a solution to address and win a very large market. As Peter Thiel notes in Zero to One, some successful founders start with a small market and find ways to grow it to something much larger over time. The key is the size of the ultimate market, not its initial size.

There are a select few companies that have been able to keep growing rapidly, in terms of revenue, profit and market value, well past their 10th year. Facebook is now 12 years old, Google is almost 18 and Amazon is over 20, yet these companies continue to produce. Similarly in China, Baidu, Tencent and Alibaba are all over 10 years old but aren’t slowing down. I’m fascinated by these companies and expect we’ll see more develop over the next 5-10 years. But, as Bill suggests in his tweet, most companies have a limited shelf life for an IPO, so even though private capital may have its advantages in certain markets, smart entrepreneurs should keep the 6.5 – 10.5 window in mind.

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