Web 2.0: Fear of IPOs

This Web 2.0 conference is almost exclusively focused on the business end of the phenomenon. And the defining characteristic of this iteration of the tech-industry business cycle is that virtually no one other than Google has gone public. It’s as if the excesses of the dot-com bubble left the very term “IPO” tainted. It’s also the case that this time around, the market, very sanely, isn’t that keen on supporting IPOs for companies that haven’t demonstrated profitability. So the “exit strategy” of choice today for startup companies isn’t to go public; it’s to be acquired by Google or Yahoo (or maybe AOL or Microsoft).

Yesterday evening, Barry Diller advised a questioner who asked how you could “build value” today: “Don’t sell it. Just ride it. Equity is built by holding on. Sometime you gotta sell a little of it. But hold onto it if you have something of value.” (Here’s more on Diller’s talk.)

This advice has its limits, however. A successful Web service start up reaches a point, if it manages to attract millions of users, where it has to start getting really good at things like datacenters and customer support. Maybe that’s not what the founders are interested in. Or maybe it’s dauntingly expensive. At that point, selling out to a Google or Yahoo makes perfect sense. These companies are explicitly and unashamedly in the business of doing outsourced R&D for the big guys. That’s “building value,” too.

But staying independent is more fun. Look at GoDaddy CEO Bob Parsons — a colorful ex-Marine whose “I’m just a dumb guy who flunked fifth grade” serves as cover for a shrewd business mind.

Parsons told the conference about his near-IPO experience earlier this year; he said he spent $3 million preparing his SEC filings and courting bankers, only to discover that the bankers and the financial press were focused exclusively on “short term accounting paper profits.” Parsons is a believer in operating cash flow instead. He’s proud of his company, with its 920 support reps actually answering the phone when customers call in about the domain names they’ve bought. But all he heard from the public market’s representatives was, “When are you going to get your customers to use self-help so you can cut your support staff?” So he pulled the plug on the IPO.

I cringed at Parsons’ unabashed enthusiasm for ads that plant his logo on the chests of well-endowed women (“”Because that’s where every guy would be looking”). But most Web 2.0-style execs could learn something from his understanding of the basics of retail psychology: “People love the convenience and speed that comes with the Net. But when it comes to resolving problems or learning features, people much prefer to deal with other people.”
[tags]Web 2.0, web2con, barry diller, bob parsons, ipos[/tags]

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