Discover why some companies -- even in the high-tech and Internet arenas -- are avoiding the booming public market, and learn how to determine if and when pursuing an IPO is right for your business.

Some are calling it IPO fever and describing today's Wall Street as a go-go market, while others are crying "hype" and cautioning investors about risky ventures. Regardless of the perspective, one thing is certain: There are millions upon millions of dollars in revenue being generated by initial public offerings (IPOs) across many different industries each week.

Despite a few market blips, Internet and high-tech stocks are still in such high demand that almost any company with a ".com" on the end will see investors lining up with fistfuls of dollars hoping to cash in on the next Amazon.com or eBay.

However, despite these facts, some companies -- even in the hottest industries -- continue to avoid the public markets. Are they gun-shy? Or do they know something investors don't? Only time will tell. But the question remains for emerging growth companies in 1999: "To IPO or not to IPO?"

The Bad News

The owners of privately held companies who are avoiding the public market may already be aware of one of the biggest pitfalls associated with going public: loss of control. While a closely held business owner calls all of the shots, an entrepreneur "going IPO" must endure a paradigm shift and be willing to take advice from and share thoughts with outsider investors. And that is a daunting enough thought to make these business owners IPO-shy.

"If Wall Street analysts don't like the way the company is being run, your stock price may suffer, which means hard work has gone to waste. The board of directors may not like the job you're doing, so your job is in jeopardy. And, of course, the shareholders may vote contrary to your opinion, which could significantly affect your life," explains Harry S. Raphael, partner of Raphael and Raphael, LLP, a Boston-based full-service accounting and business consulting firm.

Public companies also have a greater accountability for their actions and must also meet stringent requirements from the Securities and Exchange Commission (SEC) that cause innumerable distractions to the management team. At the same time, steady growth is expected on a quarter-by-quarter basis.

"I think, frankly, the pressure to deliver quarterly results can lead to perverse decisions on the part of management," says Joe O'Brien, president of Petra Capital, a Nashville venture capital firm. "It can sometimes lead to decisions that are less than optimal for the long-term development of a business."

O'Brien says one of the greatest challenges facing a company going public is striking a balance between having access to capital and staying focused on building a long-term valuable business.

In addition, the costs associated with going public are steep, and IPOs are not always as successful as the owners hope they'll be. Public companies take on additional infrastructure costs that experts estimate may range from $100,000 to millions of dollars per year, depending on the size of the company.

Lawful Communication

Going IPO presents a different kind of communication channel, both internal and external, which must be created and maintained. Much of this burden falls on the chief financial officer (CFO), but investor and public relations firms play significant roles in the operation and daily life of a public company, as well. Such communications practices for public companies -- or those entrenched in the IPO process -- can be critical.

Gary Singer, corporate attorney for O'Melveny & Myers Newport Beach office, and head of the firm's IPO practice, says one of the major disadvantages of going public, especially for a business startup, is the SEC rules regarding disclosure of a company's competitive position.

"As a result," explains Singer, "some of the things you would otherwise like to keep private for as long as possible may have to be communicated to the public, including financial information."

And this forced open-door policy turns off some wary business owners to the idea of taking on the public market.

When a company goes public, the goal is to have very positive press surrounding the organization to generate buzz, and thus brisk sales of the stock. Experts caution against believing too much of your company's hype, however, which may open the door to competitive threats or cause complacency in terms of running the business. In any case, the investing public expects the whole truth and nothing but the truth -- and the SEC requires it.

There are also some limiting factors and "quiet periods" for companies going public where all lips must remain sealed because disclosure of certain information may have an impact on how the IPO performs.

"For a lot of organizations, having a good track using public relations and external communications in a very proactive way, [before] going public, helps demonstrate that these things are part of your normal business operations and may allow you a little more flexibility during the process," says Michael Denunzio, president of Chicago-based Four Points Digital, L.L., an independent interactive communications agency.

The Good News

Going public is not all reporting, filing and communicating your every move to the street, however. There are obvious and significant advantages to entering the public markets -- namely the potential financial return. Pursuing an IPO is a way to raise large sums of capital that are unobtainable through other methods.

Ira Kaplan, partner in the Ohio-based law firm of Benesch, Friedlander, Coplan & Aronoff LLP and co-chair of the Middle Market Group in the firm's corporate and securities practice, says public stock presents a business owner with liquidity, allowing him or her access to personal wealth at an enhanced value.

"Stock of a public company typically trades at a much higher value than shares of a private company can be purchased for," explains Kaplan. "Public stock also provides companies with a currency that they can use to do transactions, such as acquisitions or licensing agreements."

More good news comes in the form of legitimacy. A public company generally receives much more publicity, which can bring credibility and trustworthiness to an organization.

"To go public, rightly or wrongly, sometimes gives companies a sense that they have more legitimacy in the marketplace, not only with their customers, but with their suppliers, employees, investors and competitors," says O'Brien.

Yet another advantage of going public is employee retention. Most workers value the benefit of being able to share in the ownership of the company through publicly traded stock or an employee stock option program.

From the High-Tech Horse's Mouth

The reasons for going public are compelling -- and access to capital will always be a popular argument. So why are some businesses that would be ideal candidates for an IPO deciding against taking the plunge? Experts say some companies are wisely avoiding the public markets because they can. There are other sources of funding that can be pursued at lower opportunity costs (read: fewer restrictions and reporting requirements). The venture capital industry, for example, provides billions of dollars to capital-hungry companies annually -- sometimes in the same ballpark with what the public markets have to offer. And angel investors are another attractive option for some companies.

Perhaps the best explanation of why some companies are avoiding the public market during one of its most lucrative periods in history can be provided by the business owners themselves. Maryland-based Spaceworks, an e-commerce software development firm, is one high-tech company that has chosen to remain private. David MacSwain, president and CEO of Spaceworks, says that from where he sits, life is a lot simpler as a private company in terms of rules, regulations and expectations - although he plans to take the plunge someday.

San Diego-based WebSideStory, a leading provider of Internet traffic analysis tools, is also resisting an IPO - but for a different reason. Michael Christian, chief operating officer and general counsel for WebSideStory, says his company simply isn't ready yet, despite how the market is performing. He explains that he wants to have a substantial business to bring to market -- one that will result in the underwriting syndicates knocking on their door.

"We think in the long run, we are safer and more likely to succeed as a privately held company because when you go public with ridiculous multiples on earnings and end up with a huge market capitalization, you don't get to bail out of your ownership overnight in the middle of the Internet bubble," says Christian.

On the other hand, Jack Reynolds, president of Quik International, a franchiser of Internet Service Providers, says selling out just doesn't make sense for his company because the real money in his arena will be made over the long haul.

"We put together our business model in such a way that we are profitable, and we generate positive cash flow. So we don't have any need to go public from the standpoint of raising money for operations or in terms of meeting payroll," explains Reynolds. "The problem is, if we bring in stockholders and an outside board, their mission may be different than ours."

InfoGlide, a leading search engine company, also has issues of control. "We have been besieged with venture companies and investment bankers trying to get us to go public. We will not do it because we will then lose our ability to control our destiny," says Jay Valentine, InfoGlide's CEO. "For example, if we went public, tied to generating all kinds of quarterly revenue for some strangers, we would not be able to do some of the pro bono work we do."

Weighing the Proverbial Pros and Cons

Certainly, every business is unique, with different needs, motivations and goals, and experts suggest thinking long and hard about whether or not to go IPO. The first step in making the decision is considering whether or not you can find capital through other venues. If a business can find alternatives to the public market, the owner and management team can avoid or postpone many control issues.

"What I ask clients to consider most is that going public, in some respects, is like selling a business. You are taking on partners and giving up a degree of control over not only the ownership of the enterprise, but also your ability to make certain business decisions in the future," explains Singer.

A private company going public must accept the reality that it will need to change the way it operates. This poses a significant challenge that some companies may not truly be ready to undertake. Kaplan warns that going public prematurely can put a company at a tremendous disadvantage because if you can't manage the requirements, then the issue becomes one of having the burdens and costs of being public without receiving any of the benefits. But, Kaplan adds, if you are in the right industry at the right time, going public can be a smart move, stimulating company growth.

Preparing for the Pressure of the Public Eye

If you do choose to go IPO, start getting your affairs in order now. Experts agree that companies planning to go public should begin preparing as early as two years in advance. Public companies operate under the microscope of analysts and investors, so getting your legal and financial matters in order is a must. Audited financial statements will be required, usually for a three-year period prior to your IPO.

Choosing an underwriter is a massive undertaking in itself. An ideal underwriter will have expertise in your industry and will follow your stock afterwards to ensure there is a viable trading market for the shares. (For additional reading on choosing an underwriter, see the resources listed at the end of this article.)

Singer says that one of the most important preparations for the public market lies in establishing solid employee compensation agreements. Kaplan concurs: "The investment community wants to know you have good, solid, contractual relationships with your key people and that they are properly incented."

Indeed, a well-rounded management team is vital. While it may be common for companies to put in some "window dressing" management right before their IPO, these individuals may or may not gain power in the company. O'Brien points out that during the all-consuming IPO process, you need to have confidence that there are quality people back home running the business so the company's quarterly objectives can be realized. Further, having a deep bench to back up the CEO allows an organization to weather the storm of a key individual leaving.

The ongoing pressure of living under a microscope is the final self-check for entrepreneurs deciding to remain private or go public. While the probing public is primarily concerned with company performance, individual officers who run the company are also under scrutiny. Compensation levels and employment arrangements of the top five executives are typically required to be disclosed in publicly filed documents.

Singer stresses that entrepreneurs should understand exactly what they are getting into with the public market. "Management needs to know they are in for a pretty intense effort," he explains. "The more time you can spend on the front end thinking it through and planning for it, the easier it will be to go IPO."

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