During a wide ranging discussion over lunch in London last week, the Utah entrepreneur discussed why tech companies shouldn’t rush to an initial public offering (IPO), the state of the current financial markets and how to maintain control of your startup.
"In my opinion, the financial markets are completely messed up now."
Elkington laid out the three reasons he believes companies have to go public and why high-growth tech companies are exempt:
1. Liquidity - "Which you can get now in private markets, frankly at higher valuations. So that’s an invalid reason."
2. Fundraising - "You do it for fundraising, which again, you don’t need to go public for. You can raise billion dollar rounds."
3. Market acceptance and brand - "These guys are some of the most talked about and written about companies on the planet."
"So there’s actually no reason to go public."
Speaking to CNBC last month, Uber CEO Travis Kalanick said an Uber IPO is "unlikely".
"What I like to say when you get into something that feels like a bubble or, at least, feels irrational is that you still want to build a company that has a strong discipline business building culture."
It is worth noting that Elkington didn’t take venture funding until late in the lifecycle of building his predictive analytics business Insidesales.com. After years of bootstrapping, Elkington took his first round of institutional funding at a point when the company had more than 500 employees, setting the company off on the fast track to a unicorn valuation ($1 billion) back in March 2015.
Control is clearly important to Elkington: "[Private equity] are looking for bigger amounts of liquidity. If a CEO is savvy about it, you feed the beast along the way and that satiates the beast. If you don't, they get anxious and will force your hand. And if the way you have raised money gives the controls to your investors, then you have no choice."
Going down the IPO route forces companies into a "quarterly reporting cadence" which limits your ability to make long-term decisions, according to Elkington. "So you have people in the markets that are saying companies should go public, saying it forces them to be more vigorous in their reporting. That's a mistake if you are in hyper-growth."
Having weathered the 2008 financial crisis, Elkington speaks from experience: "A bunch of the unicorn leaders are out of school for like six or seven years. Since 2008, they've never seen a downturn, it’s all they know."
Then the market fundamentally changed a year ago: "The market before that, and when I say the market the venture guys, the private equity guys, the crossover guys, the public guys, were all saying: "Grow at all costs, I don’t care."
A year ago they flipped and said, “we want you to grow smartly.” Not at the cost of stupidity or efficiency.
"Now they are saying it’s growth rate less burn rate. So if you are going at one hundred percent but you’re burning thirty precent, they are only going to give you credit for seventy percent growth rate. So a lot of these companies that are growing at one hundred percent but burning one hundred percent have virtually no value."
However, "[tech unicorns are] not going to disappear," according to Elkington.
"What we're seeing is a transference of value. The ones that will win are the ones that reach critical mass first. The debate around if this unicorn phenomenon is going to go away is not a debate. It’s not going to go away because the winners are out there. The good news is there is a threshing of the market. The guys who don’t have much critical mass, or are based off of non-pertinent metrics are going to go away."
In Elkington's mind the winners are the ones that maintain control of their product and their proprietary data.
The losers? "If you look at the entrepreneurs who have relatively no experience, a reasonably passive board that aren’t going to mentor them, those are the ones that are going to run into trouble," he says.
Elkington says he was at a dinner during Morgan Stanley's banking conference last month, and that all of the CEOs in the room, bar one, said that the economy and the financial markets have "no bearing on their ability to grow and scale their business."
Insidesales.com’s Business Growth Index backs this up. The report found that: "Tech companies are building up momentum with the highest 2015 growth (36 percent) and largest projected 2016 growth (45 percent) of any industry."
"Everywhere else people seemed to feel bullish," says Elkington, "which we ironically found in our index. So here’s the point. This is a financial markets issue, it isn’t an economic issue, which is an interesting nuance."
Elkington finished with an anecdote that sounded like it had been lifted from a Michael Lewis book: "One of the largest hedge fund managers, I won’t tell you who he is, told me: "I’m shorting tech. I don’t even care who it is, I’m just shorting it. I’m driving the price down and I’m making money all the way down and I am going to ride it all the way back up." Isn’t that crazy? We all saw The Big Short right. He said: "I call my cap market’s guy and ask him "whose tech can I short today? and he’s like: "Splunk." OK, short 'em."
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