Henry Kravis, co-CEO of private equity firm KKR and general equity expert, commented this last June that unicorn companies—another name for a startup that has exceeded $1 billion in value—shouldn’t rush to go public. But many commenters are speculating that a downturn in the market is inevitable, as it always seems to be, and perhaps it’s better to simply cash out now than wait for a tech company’s valuation to drop.
However, cashing out carries the threat of shifting the focus of a startup from growth to profitability, and it also reduces startups’ ability to fully flesh out their products and portfolio. Ultimately, it’s up to each unicorn to decide if an early IPO is really worth the trade of freedom for profits.
Though Kravis stresses that he would never tell a company not to go public, prices garnered by tech startups may fall soon, especially if they can’t make their businesses profitable quickly. Currently there are about 131 startups valued at $1 billion or more, up from only five years ago. The rate of growth for unicorn companies has been explosive, exponential—and many are thinking that bubble of growth has to burst, and soon. The New York Times predicts that unicorn startups’ fall from grace is going to be a slow and bumpy one with many changes to the startup landscape. “Investors are likely to refocus on business model viability and path to profitability,” says venture capitalist Bill Gurley.
This future startup landscape, where startups that need venture capital the most will be the most likely to fail, will be unkind to any company that prizes growth over profit. Kravis urges young companies to “define [their] culture as early as they can,” and to “avoid exposing themselves to the scrutiny of Wall Street too soon.” Companies should be solid and be able to show a viable trajectory before going public—and, in the future, investors might be less likely to fund startups whose only goal is simply to go public in the first place.
There are other reasons for unicorn companies to worry. There’s the “denominator effect,” for example, which ultimately means that venture capital firms will have less money to invest in startups. The denominator effect was part of the financial meltdown of 2008. Also problematic will be mutual and hedge funds which have been investing in companies that hope to go public but haven’t yet. Kravis suggests companies wait to go public until they have a really good reason to; going public too soon could prove chaotic, and ultimately fatal, to businesses which may have otherwise become gradually profitable.
“I’d tell [unicorns] to wait so they don’t have to go quarter-to-quarter,” Kravis says. “I think the worst thing to happen to corporate America is quarterly earnings.” If venture capitalists invest in the “losers,” it could be really painful. He encourages his own company to evaluate anything that could go wrong with future investments–which, with startup companies, could be any number of things. Kravis recognizes that the future of the tech startup industry could be anybody’s guess, but he hopes that businesses, especially unicorns, will be smart about their decisions if and when they decide to go to public.