In 2009, during the tumult of the economic downturn, SAS CEO Jim Goodnight decided that, despite the risks, he would not downsize his company.
Goodnight announced that there would be no layoffs at any of SAS’s roughly 400 worldwide offices. The company implemented hiring freezes and cut costs, but Goodnight refused to follow the path of SAS’s competitors. That year, the company reported 2.2 percent revenue growth and increased profits. In January 2012, SAS reported that growth had increased to 12 percent and revenue was a record $2.73 billion.
In Silicon Valley, Goodnight would be considered an outcast. His company would be called a “lifestyle business” and he would be ridiculed for not having taken it public. That’s because Silicon Valley, like Washington, D.C., believes that the IPO is Nirvana for tech companies.
In the Valley, they call the IPO an “exit” and glorify the entrepreneurs who have reached this milestone. Young entrepreneurs are led to believe that, when their company goes public, they become rich and famous and get to enjoy the fruits of their labor. Meanwhile, in Washington, the conventional wisdom is that the IPO is a job-creation and economic-growth elixir. One of the key provisions of the much-touted JOBS Act was an “IPO on-ramp” which eased regulations for certain companies wanting to go public. The President said the Act “will help entrepreneurs raise the capital they need to put Americans back to work.”
When it comes to the IPO, both the Valley’s entrepreneurs and our government leaders are misguided. The IPO isn’t a profit superhighway, with on-ramps and exits for entrepreneurs thirsty for a quick profit. Rather, an IPO is like a marriage. Post-IPO, an entrepreneur’s life changes completely. They are burdened with greater responsibilities that they are too often not prepared to handle. When it comes to job creation, yes, companies do create some jobs after they go public, but nothing approaching the 900 percent growth in employment over 10 years that the University of Florida Professor Jay Ritter says a 2011 National Venture Capital Association report implies. The cumulative 10-year growth rate for IPOs, according to Ritter, is closer to 60 percent. But only 29 percent of the startups that go down the IPO path survive as public companies, according to a Kauffman Foundation report co-authored by Ritter and released in May.
The biggest IPO winners are the investment banks, which rake in huge fees regardless of the IPO outcome, and the venture capitalists who get to cash out. That is why their lobbyists work so hard to persuade our government to loosen IPO regulations.
Take Facebook as an example. Its IPO may actually end up harming the company and creating fewer jobs than if the company had remained a private entity. Yes, Facebook has raised $16 billion that it can spend on building new technologies and acquiring startups. But it won’t be able to use all of that cash because it is under extreme pressure to increase profits and exceed analyst expectations. So, the company will likely hire fewer employees and find ways to sell more ads and commercialize the information it has about its users, which will alienate its user base. Facebook also faces resentment from the people who have lost a significant percentage of their investment because of the disappointing stock price.
The big problem with the race to the IPO is that growth becomes more important than profit; the destination—an exit—becomes more important than the journey, and the employees are simply a means to an end. And then, after the IPO, the focus becomes short term in order to appease investment bankers and sharpen the company’s focus almost entirely on growth and profits.
That’s why Silicon Valley needs to rethink its fascination with IPOs. There is nothing wrong with “lifestyle businesses” that grow steadily, focus on employees, and build wealth over the long term.
SAS could be considered the bedrock of Cary, N.C. It provides its employees excellent benefits—like two on-site childcare centers, an employee health-care center, wellness programs (which include a 66,000 square-foot recreation and fitness center), “eldercare” programs for parents of employees and soda fountains and snacks in the break rooms. This is the reason that SAS is always rated as one of the best places to work in America. Goodnight doesn’t have to apologize to anyone for putting the needs and welfare of his employees ahead of profits. In turn, his employees reciprocate with dedication and loyalty: SAS’s turnover rates are among the lowest in the industry—at 2 percent.
Rather than more companies like Facebook, we need more like SAS. That is what will create the jobs and the sustainable, long-term growth our economy needs.
Wadhwa is a fellow at the Rock Center for Corporate Governance at Stanford University and is affiliated with several other universities. Read more about Vivek Wadhwa’s affiliations.
This story originally appeared on WashingtonPost.com. Disclusure: The Washington Post Co.’s chairman and chief executive, Donald E. Graham, is a member of Facebook’s board of directors.
This story originally appeared on Www.washingtonpost.com. Copyright 2012