Ask technology entrepreneurs what their business goals are for the next three years, and without exception they will tell you they want to take their companies public. Inevitably, this ambitious proclamation will be followed by a joke about sunning in the south of France or fishing in Montana or some other early retirement scheme. Why? Because the initial public offering (IPO) has replaced the lottery fantasy as America's favorite get-rich-quick daydream. In a market where Internet companies, unique only in the amount of red ink they produce, can achieve billion-dollar market capitalizations, it is not hard to understand why each and every tech entrepreneur lives for that golden moment when equity becomes liquid.
While surely none of us begrudge these go getters any hard-won riches that come their way-aren't we all happy for Bill Gates?-it would be foolish to ignore the IPO's potential to negatively impact those all-important individuals who helped these would-be Rockefellers along the way: the customers. If, for instance, the managerial brains behind your CRM vendor cash out after an IPO and take the France/Montana option, what happens to your company and that $250,000 system you just purchased? Will you get the upgrades you need to keep this system competitive? What happens to service? Will your vendor-and your CRM initiatives-simply wither and die?
While in most cases, IPOs are simply a tool to raise capital, consider this: What would you do if suddenly you had enough money to live very comfortably for the rest of your life? Exactly. The cut and run risk is there. When, as a customer, you invest large amounts of money in technology, you are investing in the company that produces it and, more important, in the brains behind that company. Before making such an investment, you need to make sure those brains will be there when you need them.
IPOt of Gold
Over the last four years, technology-sector IPOs have proceeded at a torrid pace, raising billions of dollars. While recent Internet offerings like Amazon.com and eBay have dominated the headlines with their inflated stock values, software companies, including many CRM vendors, have certainly kept pace. Since 1996, over 300 software vendors have gone public, the deals reaching a total value of over $17 billion.
While this amount could potentially buy a lot of land in Montana, according to Ben Holmes of IPO Pros, most does go back into the companies selling the shares. "The perception of the IPO is that it is a cashout," he says. "In reality, most companies are looking at the IPO not as an exit point, but as a layer of financing." According to Holmes, of the 147 deals currently being tracked by IPO Pros, only 31 have selling shareholders in the IPO round.
Holmes explains that in most offerings, officers, founders, board members and other investors are forced to hold on to their stock for a "lockup period," typically 180 days. This requirement is typically written into the prospectus by investors and dictates that during this period, those in charge must run the company and keep share value up. Additionally, these investors will put a CFO in charge to ensure continuity.
But the fact that such precautions must be taken evidences the cash- out risk. Before investing in CRM technology, ask potential vendors about their plans for the future. "I would look for a long-term employment agreement or some forced vesting," advises Holmes. "There needs to be something that would force [management] to keep some skin in the game, something to put them on the same side of the cause as you."