Mark Zuckerberg, who delayed Facebook’s entrance into the stock market for years, now believes that going public made the social network a better company. Facebook ramped up its mobile ad business as a result of pressure from public investors, who were initially skeptical of the company’s 2012 initial offering. Facebook is now inching in on Google in the race to become the world’s largest mobile advertising company, and it’s hard not to credit the I.P.O. for the zeal with which it staked out that position.
So far we’ve heard the operational reasons—increased discipline and strategic rigor, a sense of “rhythm” imposed by quarterly reporting, and tradable/spendable ammunition in the form of stock. What about financial or balance sheet issues?
Here it gets particularly interesting for Law Land. Back to Bill Gurley (emphasis supplied):
He argues that when businesses are hit with difficulties, public companies have more options for weathering the storm than their private counterparts do. The series of investments that make up a typical start-up’s fund-raising structure don’t do well in adversity, Mr. Gurley said.
“When growth slows, it gets complicated and expensive to raise any more money, and you hit this downward spiral,” he said
In contrast, public companies can withstand long spells of skepticism. Amazon, Apple, Google, Netflix and dozens of other tech companies have gone through fallow periods in which the world doubted their long-term prospects. Those times were painful, but as public companies each managed to survive the downturn. They weren’t wiped out by the doubts.
If you don’t see where this is going, I have to ask if you’ve been paying attention to the last ten years.
Law firms, dependent on the indulgence, trust, and faith of their partners for their capital contributions and the continuing forbearance of their bankers, can and have found themselves in a fatal liquidity squeeze faster than you can say “Dun your client now, I tell you!” Relying on the mercies of others whose self-interest may suddenly be, shall we say, mis-aligned with the firm’s, is guaranteed to lead to tears. Particularly when those others are free to adopt very short-term time horizons.
By contrast, if firms relied on public markets for funding, the terms under which you can remain solvent as a going concern are far more forgiving.
Either way, organizations whose performance, over a long period of time and for the indefinitely foreseeable future, fundamentally absorb more resources than they throw off, will fail. As they should. But logic, experience, and corporate finance 101 all align in predicting that when the going gets tough, public organizations have a longer runway in front of them before investors can force a mandatory “lights out” than do private ones.
Just a thought.
