Tech valuations may be frothy, but the IPO market is a puddle of what it could be. Nine tech companies have hit public markets in the U.S. so far this year, marking an uptick from 2016, but disappointing in light of potential prospects. A major cause is the friction between heightened compliance requirements and the need for continued growth.
Consider what’s waiting in the wings. According to CrunchBase, there are over 200 privately-held companies with a valuation of over $1 billion and a combined market cap of over $800 billion. While this represents the equivalent of less than 0.4% of the total market cap of the S&P 500, these high fliers are holding back a solid chunk of change from public markets to the detriment of employees (who can’t exercise options on the primary market), investors (who lack liquidity without a clear exit opportunity and have invested $146 billion in these companies) and retail investors (who miss the chance to fund compelling businesses).
The founders and executives delaying going public can generate liquidity on the secondary market, but as evidenced by IPOs from Snap to Coupa to MuleSoft, they’re able to generate greater returns going public. So why hold off? A commonly cited reason is the burden of public filings and increased regulatory oversight – in short, compliance.
From the insider view of Silicon Valley, I’d posit the majority of these hyper-growth companies aren’t avoiding transparency, but rather have grown so quickly that compliance hasn’t scaled with them. Now they’re in one of two situations: 1. Compliance isn’t sufficient to go public and the house needs to be put in order first, or 2. Compliance is functional, but unscalable to the point where adding more complexity will be detrimental to growth, thus making an IPO unattractive.
These pre-IPO unicorns find themselves riding the bottom curve of Exhibit 1 below with no idea how to get to the green.
Exhibit 1: Hypothetical Effects Of Compliance Friction
Common Compliance Blunders In Hyper-Growth Companies
While headlines cover major compliance blunders – think FCPA violations or accounting fraud – the majority of compliance friction occurs at the ground level. Common examples include understaffed legal departments, offline record-keeping substitutes like Microsoft Word or Excel being used in approval flows or negotiations, and weak analytics that reduce time to decision.
These manual and cumbersome processes are the legacy of rapid early growth. As companies scale quickly, early investment goes into building out sales and marketing orgs, not compliance departments.
However, this isn’t an option for hyper-growth companies if they intend to continue their growth trajectory. Outdated processes and tools naturally build a culture of risk aversion and eventually stagnation. Without complete visibility and control, hyper-growth companies will be forced to slow down or take unnecessary risks. A likely side effect is avoiding public markets. An IPO isn’t always the right move, but having the option is a must.
How Companies Can Combat Compliance Issues
To combat this, companies need to invest in their compliance at the same level they would in honing their sales processes or funding their CRM. Step one is empowering internal compliance leaders like general counsels or VPs of finance with the budgets to get the tools they need to scale. Automation in approval flows and template control can remove big compliance headaches right off the bat and free up these leaders to focus strategically instead of being reactive.
The second step is to learn from the best. Many industry leaders, like the three mentioned above, have already reconciled speed and compliance. Hiring alumni from these departments is a viable path to internalizing hard-won knowledge. When scaling compliance staff, look for this track record.
The third step is to apply stress testing. Bringing other departments into the new compliance structure will gauge robustness. If sales teams are creating and executing their own contracts from up-to-date master templates, procurement is closing deals with preferred vendors faster and HR is seamlessly onboarding new hires – all while being transparent and fluid – then compliance is likely built to scale and a company can move fast.
Compliance should uncap growth by clearing the way for sales, operations, procurement and other departments to move fast, not create friction that ultimately closes off strategic options.
