Young firms often seek growth capital to expand operations, and of those that choose to pursue an IPO, roughly 2/3 have raised capital from venture capitalists (VCs). The 2/3 proportion varies by year and is greater when lots of tech firms are in the markets (e.g., the dot-com era). In my research paper with Dr. Colette Southam published in Venture Capital journal, we find that a VC-backed firm is 14% more likely to fail to complete its IPO. Not all “failures” are bad; some firms instead accepted buyout bids. Nevertheless, why do VC-backed firms “fail”? In the research we find two primary reasons. First, VC-backed firms have an alternative to a low IPO price. Instead, the VC can fund another round and then retry the IPO later. Second, VC-backers more often “test the waters” of the IPO markets with firms that are too risky or too early and are screened out by astute equity investors. Does this mean your firm should avoid VC-backing? Quite the contrary, only a very tiny proportion of private firms raise VC money, while most firms going public have VC-backing. VC backing increases your chances of ever getting to the IPO stage.

A firm seeking to go public in the U.S. files documents with the SEC. With some minor limitations, it can withdraw from the process at any time. Understandably, media focus is on IPO successes rather than failures, although more than one in five filers does so. Withdrawal is not always a bad thing. For some firms a better offer arrives (e.g., a buyout bid) while for others it is a bad thing (e.g., investors are unwilling to invest). Importantly, the net result of a withdrawal is one less publicly traded competitor. In a recent paper I have with Dr. Craig Dunbar, we show that the existing publicly traded competitors experience a positive cumulative abnormal return of about .35% when a “would be” competitor fails to complete its IPO. Can you profit from this? Not likely. You would have to predict a withdrawal, and then buy stock in competing firms. Only those inside the firm’s IPO process would have enough insight. The rest of us must read the tea leaves.

A good strategy is one you would not be stupid not to do. What does that mean? In part, that means that it is not necessarily obvious.  Similarly, good (business) innovations are generally novel but also uncertain before becoming reality. Good strategies share must also be novel and not obvious because if they were obvious someone else would likely would have already done it. They are uncertain because the likelihood of successful execution is unclear — if it were certain, someone would have done it, right? Imagine a spectrum of strategies from “stupid” to “brilliant”. The stupid ideas are bad, while the brilliant ideas have already been done suggesting that good strategies fall somewhere in between. Using this novelty-uncertainty framework, a good strategy will be developed and implemented only when you have people capable of novel/disruptive thought, but also willing to tolerate uncertainty, (one would hope) driven by their confidence in their ability to execute.

Chrysler Group LLC has withdrawn its planned IPO. See the filing here. Earlier this year I posted about firms that file for their IPO as a mechanism to attract M&A bids. This is a similar example. Instead of completing the IPO, Chrysler scrapped it after Fiat agreed to buy the ownership stake that was to be sold in the IPO. Fiat bought ~41.46% of Chrysler owned by the union. The stake had been for sale (to Fiat, among other buyers) but the groups could not agree on a valuation. The IPO filing created a credible threat that forced Fiat’s hand, but also served as a price discovery process and allowed both sides to better realize a fair market value for the stake. A properly orchestrated IPO can serve several purposes.