IPOs are about Growth
Twitter set its share price at $26 today valuing it at roughly $18 billion, according to NYT. A few days ago I ran across this article that discusses the value drivers for IPOs of startups.
The single biggest driver of value at the time of IPO is growth. Profitability is almost irrelevant and the majority of startups are not profitable at the time of IPO. They are not profitable because they are consciously deciding to focus on growth over profitability.
Paul Graham wrote a great essay on Growth – a must read.
On a smaller scale, early startups often have to decide what to do with revenue received. Founders and CEOs of early startups are often the lowest paid individuals in the company. They choose instead to reinvest for growth, largely by paying sufficient wages to other team members to get stuff done.
The balance between profitability and growth is difficult to juggle and depends upon a number of factors over the lifetime of the startup. I’ve always been a fan of reinvesting for growth and multiplying the value of each revenue dollar received.
How do you balance growth and profitability?