According to the SmartUp methodology, the drive toward an IPO is largely dictated by the Venture Capital business model. Venture Capital firms manage money from limited partners and must return capital within a defined timeframe, typically 7–10 years. An IPO provides the liquidity necessary for VCs to convert their equity into cash. To reach the valuations required for a successful IPO, VCs push startups to grow as fast as possible, since public market valuations are often based on revenue multiples and growth rates.
Yonatan Stern provides a reality check on the likelihood of reaching an IPO. An analysis of Israeli startups founded since 2000 shows that out of more than 20,000 companies, fewer than 100 went public, and only 38 achieved a valuation above $100 million at IPO. This data implies that the odds of a significant IPO are approximately 1 in 500.
For a company to be suitable for an IPO in major markets, certain financial benchmarks are generally required. These include annual revenues of $100 million or more, year-over-year growth of at least 20%, and, increasingly, profitability.
SmartUp categorizes an IPO as part of a “Finite Game.” Once a company goes public, founders often lose independence as management shifts toward meeting quarterly expectations of public shareholders. As an alternative, SmartUp encourages founders to focus on profitability and play an “Infinite Game,” building a sustainable and independent company where an exit is a choice rather than a requirement.
