The joy of being private

To IPO or not IPO? While they may have less cash in their coffers, privately held companies enjoy a set of privileges that public firms must do without. Likewise, challenges are different too for an independent.
Written by Sm@rt Partner, Contributor on
Across the country, nervous investors have one eye on CNBC and the other on Yahoo! Finance. From Wall Street to Main Street, everybody is trying to see where the volatile stock market is heading next.

Despite a market rally late Friday, many companies have seen their stocks punished because of soft Q3 results. Among the hardest hit have been Web integrators and consulting firms. And there's growing concern that the Q3 sell-off may stretch into Q4.

Yet executives at Zefer, a Boston-based Web integrator, are remarkably upbeat. So are the folks down the road at Nervewire and NetNumina Solutions. Ditto for the managers at Agiliti and Stonebridge Technologies.

What gives? As you might have guessed, all of these companies are privately held--and darn proud of it. "Bullets are out their flying," says Mark Payne, CFO of Agiliti. "But when you're a private company, you can pull back to the shadows. You can avoid being hit."

Zefer is equally pleased with its position. "People thought we had bad timing [when we withdrew] our IPO plans," says Zefer president and CEO Bill Seibel. "In fact, our timing was great."

Zefer canceled its IPO twice this year because of Wall Street's turbulence. The company intends to go public as soon as the market regains some of its luster.

In the meantime, remaining on the sidelines has its advantages. For starters, private firms don't have to answer to naive shareholders. And private companies can focus on their long-term operations rather than on day-to-day market gyrations.

Still, private firms face their own set of challenges. The search for funding can be quite a distraction. And many private firms will never secure enough funding to grow as quickly as their public rivals.

Yet private firms have little choice but to put their IPOs on ice until the market heats up again. "Right now is not the time to go to the public market for capital," says Treb Ryan, senior VP of operations and founder of SiteSmith, which was acquired by MetroMedia Fiber for $1.4 billion in stock last week. SiteSmith, an Internet infrastructure provider, had planned to go public at some point in the near future, until MetroMedia stepped into the picture.

It's no secret that Wall Street is fixated on short-term results. Five-year strategic plans are of little use to shareholders who crave quick, 20-percent returns on their money.

By contrast, "private companies can take a long-term view," says Stephen Richards, CFO of NetNumina Solutions. "You can sit around a table with investors and focus all your energy on building a company rather on than maintaining its stock price."

Adds James Schoonmaker, VP of marketing at consulting firm Nervewire, "We get a chance to sit back and watch the [public] companies trudge through the mud, and we can perhaps learn from their mistakes."

The biggest misstep public Web integrators made this year was placing too much emphasis on revenue and staff growth. Zefer, by contrast, says it has been driving toward profitability since the company's launch in 1998. "According to the plan, once we get above 700 to 750 billable employees, we are able to get profitable," says CEO Seibel. "We'll complete our march to profitability by Q4 or Q1 [2001] at the very, very latest."

If Zefer happens to stumble, the company can quietly tweak its business plan behind closed doors. Public players aren't as fortunate. Just ask Web integrator iXL or application service providers like Breakaway Solutions and Interliant. All three companies recently overhauled their business plans and announced layoffs because of Q3 earnings warnings.

Such public missteps can trigger panic within the ranks and extensive staff departures. At a private firm, you don't have to calm down staff or try to prevent them from leaving when their options are under water. "Options are real attractive when your [company's] stock price is going up," says Richards. "But when it goes down, keeping focused is hard. I don't have to worry about that."

Adds Nervewire's Schoonmaker, "We avoid the huge distractions that come with being public. [We] can focus more clearly on the real priorities and not get hung up with impressing the public, which doesn't understand your business as well as [we] do."

Of course, privately held companies face their own set of challenges. Instead of raising money on the open market, they have to find alternative funding from venture capitalists (VCs), angel investors, vendors or partners. The process can be a grueling, full-time job. And VCs tend to become more selective in their investments during a Wall Street downturn.

Still, there's money to be had. Adam Lilling, CEO of e-commerce site developer Pazanga, says strategic partners may be the best source of funding in the current market. Pazanga recently received an investment from one of its key customers, Virgin Entertainment Group's Virgin Megastore Online.

Other companies are finding money from more traditional investors. E2i, which specializes in integrating new and old economic models, recently received $22 million in first-round funding. Morgan Stanley is among its backers.

"Being private enables us to develop our process methodologies and scale our business without the pressures [from public investors]," says E2i marketing director Susan Miranda. "Issues like low utilization and pricing are going to slam the publicly held integrators and Web developers. We've got the time and the freedom to put our strategy in place and build our culture, before we go out with a big splash into the market."

Meanwhile, other private companies also are lining up funding. Agiliti, for one, is working on its third round of private funding. The company expects this round to surpass the $16.5 million that Agiliti raised in round two.

"Money is still in the market, but the folks doling it out are being more careful," says NetNumina's Richards. "Investors want to see profits or a demonstrated way to get them. If I want to raise $20 million in private money, I have to sell a lot more of the company to do that."

Still, consulting firms won't take money from just anyone. Many companies are looking for VCs that display market patience. Stonebridge, for one, says its VCs--Arlington Capital and William E. Simon & Sons--are willing to wait three to five years for the consulting firm to go public, if that's what it takes.

Time is one luxury that publicly held consulting firms don't have right now.

By Mark Mehler, John Moore, Bernice Napach and Joseph C. Panettieri.

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