IPO Is Only A Milestone, Not A Measure Of Profitability
Initial public offerings (IPOs) have long been celebrated as major milestones in the life of a company, often viewed as a crowning achievement that signals success and growth. When a company “goes public,” it garners significant attention from investors, the media, and the general public. This moment, undoubtedly, represents a turning point in a company’s history, particularly in terms of its marketing exposure and access to capital. However, contrary to popular belief, an IPO does not inherently signify the source of a company’s profitability. Instead, a company’s true financial success stems from the core products or services it offers, which drive its sustained revenue and market reputation. Many small companies today seek to fast-track their way to an IPO, overlooking the importance of laying a solid foundation of profitability and market trust. A company’s ability to generate lasting value through its operations, products, and customer relationships ultimately determines its success, with the stock market serving as a secondary reflection of that profitability.
An IPO’s impact is often overemphasized because it is such a visible event. The process allows companies to raise significant capital, attract media attention, and gain market credibility. However, as noted in studies on post-IPO performance, the majority of a company’s profitability lies not in its stock price but in its underlying business operations. A report by PwC highlights that while IPOs can inject fresh funds into a company, sustainable profitability is achieved through a company's ability to grow its business and satisfy customers in the long term. Many businesses that rush to the public markets often find themselves struggling to maintain investor interest or achieve consistent profitability because they have not established a solid operational base prior to going public.
The notion that the stock market is merely a reflection of a company’s profitability, rather than its core driver, underscores this reality. While an IPO provides a boost in capital and liquidity, it does not alter the fundamental dynamics of a company’s operations. Indeed, there are countless privately held companies that operate highly profitable businesses without ever resorting to public markets. For example, Cargill, one of the largest privately-owned companies in the world, generates billions in revenue annually yet has never gone public. This demonstrates that profitability can be entirely independent of public market status, with the core focus remaining on the business itself—how well the company delivers its products or services to its customers.
Furthermore, many startups today are tempted by the allure of an IPO as an immediate path to success, often viewing it as a shortcut to market legitimacy and investor approval. This mindset overlooks the critical importance of building a strong foundation of business operations, product-market fit, and customer loyalty before seeking external validation through the stock market. According to research published in Harvard Business Review, companies that rush toward an IPO without first establishing a robust operational model often falter post-IPO, as they are not equipped to handle the scrutiny and demands of public shareholders. This focus on short-term gains—driven by a desire for quick funding and market exposure—can derail a company’s long-term profitability.
Building up the foundation of a company's operating profitability is crucial for any firm, especially in its formative years. Profitability is not built overnight; it requires time, effort, and strategic planning to ensure that the company’s products or services are viable in the market and that they can generate steady, growing revenue streams. As Peter Drucker, the famed management consultant, once remarked, “Profitability is the result of efficiency and effectiveness, not necessarily the result of scale.” Companies that prioritize operational efficiency, customer satisfaction, and product development are far better positioned to generate long-term profitability than those that focus solely on scaling quickly through an IPO. In many cases, companies that go public too early face immense pressure from investors to perform at a level they are not operationally ready to achieve, leading to reduced focus on core business goals.
Moreover, research consistently supports the idea that when founders and executives focus on communicating and delivering long-term value to their customers and clients, investors will naturally gravitate toward the company. A study from McKinsey & Company found that companies with strong customer value propositions and long-term strategies outperform their peers in the stock market over time. This is because investors, particularly those interested in long-term growth, tend to favor companies that prioritize sustainable business models over those seeking immediate financial returns. When businesses demonstrate their ability to consistently deliver value to customers, they create a virtuous cycle of growth, trust, and, eventually, profitability, attracting investors organically.
Companies that emphasize long-term value are often those that foster deep relationships with their customers, continuously innovate, and adapt to changing market conditions. By focusing on these factors, businesses are more likely to generate repeat business, higher customer lifetime value, and positive word-of-mouth, all of which contribute to profitability. For instance, companies like Patagonia and Zappos have earned stellar reputations for their customer-centric strategies, building loyal customer bases that fuel their financial success without needing to rely on quick capital infusions from the stock market. Their eventual transitions to IPOs, should they choose that route, would be built on solid operational foundations, ensuring long-term investor confidence.
The natural progression toward an IPO for such companies is reflective of their overall success in creating value—not just for shareholders but for customers, employees, and stakeholders. As companies build trust within the market and establish a track record of profitability, the decision to go public becomes an organic extension of their growth trajectory. The stock market, in this case, becomes a platform for further expansion, rather than the sole indicator of success. By focusing on creating value through their core business offerings, companies can ensure that when they do go public, they are prepared for the rigors of the public markets and can continue to grow sustainably.
The concept of an IPO as a milestone, rather than the ultimate goal, shifts the focus from short-term financial gains to long-term business health. Companies that concentrate on cultivating profitability through their products and services, while continuously improving their operations, are better equipped to handle the demands of being publicly traded. Investors naturally flock to companies that demonstrate consistent performance, strong customer loyalty, and a clear vision for future growth. This approach minimizes the risks associated with going public prematurely and maximizes the company’s chances of success in the long run.
While IPOs undoubtedly mark significant turning points in a company’s history, they do not represent the core of a company's profitability. That core lies in the value companies deliver to their customers through the products and services they offer. Small companies seeking to rush into the public markets often overlook the foundational work required to achieve sustainable profitability. As research suggests, when businesses focus on delivering long-term value to their customers, investors will naturally be drawn to them, leading to an organic path toward IPOs. Ultimately, it is the quality of a company’s operations, not its stock price, that determines its long-term success.
Sources:
PwC. (2022). Global IPO Watch: Driving sustainable growth through an IPO.
Harvard Business Review (2020). Why Some Companies Fail After Going Public.
McKinsey & Company (2021). The long-term value of customer-focused business strategies.
Drucker, P. (2008). Managing for Results: Economic Tasks and Risk-taking Decisions.