Consideration Piece: The Public Markets Trial: The Significance of Going Public in an Era of Giant Private Entities
Raphaëlle d'Ornano serves as the Managing Partner and Founder of D'Ornano+Co, a trailblazer in Hybrid Growth Diligence. Lately, Goldman Sachs CEO David Solomon raised some eyebrows when he questioned if high-profile tech companies should skip going public, pointing out thriving entities like OpenAI, Stripe, and SpaceX in the private market sphere. While Solomon's observation regarding the growth of private capital markets is spot-on, it overlooks a fundamental truth: Public markets continue playing a pivotal role in testing business model resilience and assessing corporate governance.
The Imperative of Public Markets
The primary purpose of public markets isn't just about securing capital; it's about confirming business strategy endurance under the microscope. Take Microsoft as an example. When cloud computing emerged as a rising trend, anxious public market investors wanted concrete evidence of the company's ability to transition from traditional software licensing to cloud services. Microsoft delivered by embracing metrics like commercial cloud revenue in 2015 and Azure consumption growth in 2017, which helped investors gauge their cloud transformation and accelerate their progress towards becoming a cloud computing leader.
Similarly, when Adobe launched Creative Cloud with its subscription-based model in 2012, it faced skepticism from the public market. The company countered by revealing critical metrics, such as annual recurring revenue (ARR), churn, and customer lifetime value. This transparency instilled confidence in the wisdom of the company's strategy and its potential to create long-term value, ultimately propelling Adobe's business transformation success.
Essential Metrics in a Changing Tech Landscape
Today, technology companies keen on innovative technologies, like generative artificial intelligence (GenAI), are confronting transformative moments. Public scrutiny can help establish fitting metrics to evaluate these businesses effectively. For instance, gross revenue retention (GRR) has become a significant metric for SaaS companies to determine their product stickiness. This attention to detail in the public market has been instrumental in setting industry benchmarks.
When it comes to AI-first businesses, we need similar consensus about relevant metrics such as revenue from GenAI features, their impact on customer productivity and retention, and the unit economics of AI model training and inference. Public scrutiny can drive the standardization of these metrics, enhancing the overall tech ecosystem by promoting more informed investment strategies.
Private Markets' Limitations
Private markets have experienced generous growth, providing substantial capital and ample liquidity. However, they fall short when compared to public markets due to the absence of rigorous pricing mechanisms. WeWork's attempted IPO illustrates this perfectly, reaching a $47 billion private market valuation before public scrutiny exposed underlying business model flaws and governance issues.
Moreover, private markets lack consistent, mandatory reporting requirements that reveal business performance and help stakeholders make informed decisions. Imagine if OpenAI's revenue growth, cost structure, and AI model economics were subject to quarterly disclosures. This transparency would establish industry benchmarks and bolster more informed investment decisions across AI.
Constructing Businesses for Public Market Success
The challenge isn't avoiding public markets but preparing businesses capable of withstanding their scrutiny. Developing clear economic metrics that gain clarity with scale, along with transparent reporting of relevant metrics, is essential. Success also hinges on reliable governance structures aligned with long-term value creation and sustainable competitive advantages that can be articulated and measured.
In 2020, Snowflake exhibited exceptional IPO success by plainly presenting clear metrics around usage-based pricing, facilitating understanding and valuing its consumption-based model. Such transparency and unwavering focus on improving unit economics and showcasing clear competitive advantages set a standard for modern data platform companies.
The Critical Role of Market Education
Public market investors will need to revamp their analytical frameworks to appraise next-generation technology companies. Traditional metrics like price-to-earnings (P/E) ratios may not account for the value of AI-driven businesses. It's crucial to analyze characteristics such as the influence of AI features on customer retention and expansion, the relevance of R&D investment to future revenue growth, the value of data moats, and the economics of AI model enhancement cycles. Companies can assist in this endeavor through public market listings, benefiting the entire technology sector.
Bridging the Gap
Rather than shunning public scrutiny, technology companies should look at it as an opportunity to demonstrate their business model's durability. By creating the blueprints for appraising emerging technology companies, we all move forward together towards a more informed and competitive tech ecosystem.
In an era of transformative technologies, validating business models with new perspectives—thanks to the public market—makes all the difference and remains paramount for enduring success. After all, private market valuations are, at best, provisional until they face the scrutiny and approval of a broader audience.
Raphaëlle d'Ornano, from D'Ornano+Co, highlights the importance of public markets in testing business model resilience and assessing corporate governance, citing Microsoft and Adobe as examples of companies that thrived in public markets by providing transparency to investors. (The Imperative of Public Markets)
Gross revenue retention (GRR) has become a critical metric for SaaS companies in the public market, helping to determine product stickiness and set industry benchmarks. Similarly, establishing consensus about relevant metrics like revenue from GenAI features and their impact on customer productivity and retention can enhance the overall tech ecosystem by promoting more informed investment strategies. (Essential Metrics in a Changing Tech Landscape)
Public markets lack the rigorous pricing mechanisms and consistent reporting requirements found in private markets, leading to potential misconceptions about a company's true value, as shown by WeWork's attempted IPO. Offering transparency in revenue growth, cost structure, and AI model economics can help establish industry benchmarks and guide more informed investment decisions. (Private Markets' Limitations)
