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So the Emperor went in procession under the rich canopy, and everyone in the streets said, “How incomparable are the Emperor’s new clothes! what a train he has to his mantle! how it fits him!” No one would let it be perceived that he could see nothing, for that would have shown that he was not fit for his office, or was very stupid. No clothes of the Emperor’s had ever had such a success as these.   
  “But he has nothing on!” a little child cried out at last.[1]

 

It’s been over 180 years since Hans Christian Andersen wrote The Emperor’s New Clothes, yet it is easy to picture Adam Neumann in an update of the tale.

Much has been written about the WeWork debacle: the tequila and weed, private jets, conflicts of interest, and obfuscation that hid an unsustainable business model.  But WeWork’s failure to go public is also an extreme example of a trait seen with many unicorn IPOs — a lack of corporate self-awareness and not understanding what it means to be a public company.  An awareness deficit created by the founders, often encouraged by powerless yet enabling Boards, private backers and ultimately abetted by advisors.

That latter point was particularly on display in the WeWork IPO.  Just like the courtiers and adoring public in Andersen’s tale, bankers and other advisors who should know better weren’t always incentivized to speak uncomfortable truths (although clients like Neumann undoubtedly would have been a difficult audience).  Bankers can easily become prisoners of the competitive dynamics of an IPO, of their own pitches (where lower valuations usually don’t win the mandate) and the short-term focus of getting a deal done, which explains the nine bank names emblazoned in an uncharacteristic circle on page two of WeWork’s now infamous S1.

Ultimately, a mixture of ego, greed and complicity led the founders and the Board, with the support of the advisors, to conclude that WeWork could go public for somewhere between the $47 billion valuation of its last funding round and the materially higher levels reportedly pitched by its bankers.

“But he has nothing on!” a little child cried out…

The lesson here for every start-up considering an IPO is forget the spin you’ve been hearing for years from (some) backers, bankers and the media.

WeWork spectacularly failed to do that.  It did not understand that it was leaving the warm embrace of private backing with its singular focus on growth for the hard-nosed public markets where profitability is king.   Any company that cannot make that leap is in for trouble if it’s planning to go public.  Corporate self-awareness is essential for a successful IPO.

The first step in any IPO process should be management updating its financial and strategic plans, competitive positioning, and eventual path to profitability.  An update not distorted by the visionary mindset of private funding rounds.  Rather an update with the conservative “under-promise/over-deliver” philosophy of successful public company management teams.  That will require a real shift in mindset after years of operating as a private company.

That plan update will be the financial foundation of everything that follows.  Only then can management effectively work with advisors to determine a credible public valuation, which in turn will permit the building blocks of a successful IPO (investment story, disclosure decisions, expectations management, etc.) to take shape.

And this is just a first step in the complex process of going public that so many companies underestimate.  While many managers would undoubtedly prefer the simplicity of remaining private, going public should be the goal of virtually every start-up.  Wealth creation of the IPO aside, being public is a critical aspect of long-term success.

After all, there’s a reason that public companies dominate the corporate world.  They have numerous advantages over their private peers.  Being public gives companies easier access to capital and credit, shares that can be used as a strategic currency and critically, financial discipline that is essential to long-lasting success.

However, the tradeoff is that being public is hard.  It requires more infrastructure and management preparation than most (including outside advisors) realize.  Being public also subjects management to ongoing pressures that complicate running a company.  While the IPO tends to attract all the attention, the reality of facing the public markets daily must not be underestimated.   Despite all these challenges, the positives still outweigh the negatives for virtually all companies.  That’s why most go public.

Nonetheless, the lesson for every start-up from Andersen’s emperor is simple – prepare, for when you go public there is always a little child waiting out there.

 

 

[1] Andersen, Hans Christian. Tales. Vol. XVII, Part 3. The Harvard Classics. New York: P.F. Collier & Son, 1909–14

 

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