Andy Rachleff: With Facebook, Valley unearths lost art of IPO
Too many entrepreneurs start companies with the goal of selling them. Former VC Andy Rachleff is hoping Facebook inspires people in Silicon Valley to think bigger.
Editor's note: This is a guest column by Andy Rachleff, whose bio is below.
Like everyone else here in Silicon Valley, I'm excited to see Facebook going public. No, I don't own a piece of the company, and I don't believe a blockbuster IPO will revive the entire global stock market, as some commentators have hyped.
What I do think--or certainly hope--is that a successful offering by Facebook will help young entrepreneurs understand why Silicon Valley embraced IPOs in the first place. And, importantly, why we need to revive the culture of the IPO.
When I entered the venture capital business 30 years ago, almost every entrepreneur I met wanted to build a great company to change the world and to make money. The goals were entwined, and because the so-called "flip" of a quick sale to Google or Facebook didn't exist, it was a foregone conclusion that an IPO was a critical goal.
Great people joined startups because they bought into the vision of the founders, and they had the opportunity to share in the potential for great wealth.
And the model worked. Silicon Valley companies that have changed the world were born, from Intel to Apple to Google.
Then came 2001. The IPO market never really recovered, as the number of IPOs from the last three decades shows. Between 1980 and 2000, an average of 311 companies per year went public. In the 00s, the average was 102--with the financial crisis dealing a further blow to the market. The decline was largest among small-company IPOs.
It's too easy to blame Sarbanes-Oxley for the drop. In a 2010 blog post called Silicon Valley's IPO Anxiety, venture capitalist Bill Gurley wrote that our pessimism might have led to a self-fulfilling prophecy.
Another, better explanation is the absence of small investment banks in the IPO market. When I started in the venture capital business, we used the "four horsemen"--Alex.Brown Inc., Hambrecht & Quist Group, Robertson Stephens & Co. and Montgomery Securities--to bring many offerings to mainstream investors.
By the early part of the 00s, Wall Street firms had gobbled up those four, and many others like them. The return of smaller investment banks, more open to risk and willing to do deals with companies that have under $50 million in sales, would surely help spur the market.
The key, however, is reviving the IPO culture. And I'm not talking about parking lots full of Ferraris. I'm referring to the power of the IPO, and why it's important that young entrepreneurs again embrace it as a worthy goal.
Seven years ago, I retired from venture capital to teach entrepreneurship at Stanford Graduate School of Business. Each year, I teach a class on the challenges faced by John Morgridge in his first 90 days as CEO of Cisco Systems. We are extremely fortunate to have John as the guest lecturer for our class.
I was blown away last year, when, halfway through the class, John asked the students, "What was the goal on the mind of every one of Cisco's first 20 employees when I joined?"
The class was completely stumped, but the answer was obvious to us old timers: The IPO! The students looked bewildered. "Why would you care about going public?" several asked.
They've grown up with a different model of entrepreneurship, that of the mostly illusory "serial entrepreneur," who flips company after company. That model, celebrated on many blog sites, says that companies ought to be created, and then quickly sold for $20 to $30 million. The entrepreneur pockets perhaps $5 million and moves on to the next startup.
What my students don't realize is that they are extremely unlikely to come up with another good idea (even Steve Jobs failed when he started his second company). More important, they haven't thought about what happens to the great people they recruited with their vision to build a world-changing company.
A flip sale might be great for the entrepreneur, but it doesn't work for the non-founder team. Why would someone work 100 hours per week for a $100,000 payoff and the-not-terribly attractive prospect of having to continue working for that big company the entrepreneur chose to leave?
For years, I've been trying to convince my students that great, independent, world changing companies are born via IPOs. I never really got through to them.
Once the students put themselves in the shoes of their future workers, the light bulb went off and they saw the benefits of building an independent public company.
That's why I'm looking forward to the Facebook IPO. Not because it will enrich employees and investors, or revive the market--though I'm happy if it does those things. But I'll look forward to it in hopes that it helps the Valley go back to a focus on building great enterprises. More people will think big. The more people who think big, the more they will create big and better companies.
Walking to my classes, I pass buildings named for entrepreneurs who built independent public companies: Hewlett, Packard, Gates, Clark, Yang, Huang, Knight and Schwab. If it were not for the philanthropy that these public companies enabled, Stanford would not be able to produce the kind of talent needed to keep the Valley's cycle of innovation in motion.