TL;DR: Be Careful What Unicorn Wish For, Cheezy Lawsuits, And Bursting The Bubble
Here’s what you need to know…
The new year has begun, and some of the most valuable private tech companies – including Uber, Lyft, Airbnb, Slack, and other so-called “unicorns” valued at more than $1 billion – are preparing for their initial public offerings (IPOs) in the early part of 2019. Thirty-eight tech and internet companies, the most since the dot-com boom in 2000, took the plunge to go public last year and more are expected to test the market this year, despite the recent market downturn and the overall trend of fewer companies doing so.
These headwinds mean unicorns should be careful about going public, as other sectors appear to have weighed the added political and reputational challenges and decided against it, and 2019 comes with the expectation that the tech industry’s public affairs challenges will begin to have an impact on their bottom line. Here’s what you need to know about minimizing and mitigating these risks as we await this year’s big, newsworthy IPOs:
- How Did We Get Here? A strong stock market and cheap capital have allowed private tech companies to incubate and scale in a favorable climate, resulting in their ability to grow into large and valuable unicorns. Investors were patient with these companies as long as the economy continued to expand and interest rates stayed low, which is why some unicorns were putting off their IPOs, even as far out as 2020, hoping to continue growing, gaining value, and avoiding the scrutiny from shareholders, the press, and governments that comes with being a public company.
- Greater Scrutiny On Executives And Business Practices: Public companies are obligated to publicly disclose lengthy filings that detail their financials and operations, which can garner the attention of the media, analysts, and activist investors (of both the short-selling and political kind). Avoiding this additional scrutiny can be particularly beneficial for disruptive companies challenging the regulatory environment in areas where they operate, as insights into their tactics and business practices could be used against them in the public policy arena by legacy competitors and other opponents, making it all the more important to understand any vulnerabilities before going public.Also, executives of public companies have to answer to a greater number of shareholders and investors, which could lead to additional scrutiny of their professional and personal lives, with anything hinting of impropriety potentially being used as leverage against them and the company.
- Becoming A Target For Activism: Once public, companies must contend with an increased risk of activism in which current or potential shareholders and investors seek to influence the company’s operations. This could take the form of institutional investors sending governance-related proposals to companies recommending changes in management and compensation, a trend that has grown an average of 11% over the past four years. Additionally, such proposals could be the result of policy-related activism, in which companies are pressured to adopt measures on topics unrelated to their core business and often part of a politically-motivated agenda. Although such proposals have been found to increase a company’s costs and diminish shareholders’ returns, navigating the inevitable attention from such activism requires a strong understanding of a company’s values and business purpose. This can help ensure they align with business decisions, and that unrelated special interest agendas are opposed. Indeed, sometimes the shareholders pushing such agendas own just a few shares expressly for the purpose of pressuring the company on policy matters, or come from institutional investors being pressured by political interests.
- Time, Money, And Reputation: Taking a private company, let alone a unicorn, public is an expensive and time-intensive endeavor with high-stakes for the company’s reputation and bottom line, and even more so when activist shareholders are waiting to pressure companies. Current corporate governance rules have made it difficult to separate legitimate shareholder concerns about a company’s management and strategy from politically-motivated pressures, not to mention this lack of distinction heightens corporate risk. Both of these factors deter companies from going public – which in turn negatively impacts main street investors as well. While the Securities and Exchange Commission is expected to focus on corporate governance this year, investor pressure on public companies is likely to increase, as well as those pushing environmental, social and governance (ESG) practices that can put political and sustainability goals above business purpose and value, raising the costs of going public in the near-term.
Rather than the “orderly queue” of IPOs predicted in 2019 and 2020, the early part of 2019 may more resemble a stampede – unless, of course, the government remains shutdownand the SEC is not working on new filings. Yet, these unicorns may regret going public if they do not have a thorough understanding of their political and reputational vulnerabilities and the wide range of stakeholders who can influence perceptions about their company’s practices. Such an understanding is vital to ensure the company does not cede the public narrative to others who could damage their reputation – and worse, drive down the company’s value.
News You Can Use
Move over McDonald’s and its hot coffee case, Cheez-Its is going to court. Three women are suing Kellogg’s, the manufacturer of the orange snacks, claiming the company uses “false and misleading marketing” by labeling its crackers as “Made With Whole Grain,” which could trick consumers into thinking they are made with 100% whole grains when they are not.
In early December, the U.S. Court of Appeals for the Second Circuit appeared to agree, ruling that a reasonable consumer could think Cheez-It Whole Grain crackers were made with “predominantly whole grain,” thereby putting the company one step closer to legal discovery and a potential jury trial (!) about the contents of one of America’s most-beloved snacks. The suit demonstrates the extent to which frivolous lawsuits can run amok in an overly litigious society, in which companies can find themselves facing increased legal and reputational risks resulting from such “cheezy” lawsuits.
“ALEXA, TELL ME ABOUT PRIVACY REGULATIONS”
An Amazon user in Germany recently requested data about his activities on the site and inadvertently gained access to 1,700 audio recordings of a random person he had never met. Following his request, the e-commerce giant sent the user a zip file that contained data related to his Amazon searches but also transcripts of Alexa’s interpretations of voice commands that were from an unknown person.
The user shared the Alexa transcript files with Germany’s C’t magazine, which listened to many of the files and was able to “piece together a detailed picture of the customer concerned and his personal habits,” including his identity and the name of his girlfriend, their jobs, and taste in music. Amazon blamed the “unfortunate case” on “human error” and described it as an “isolated incident.” Accident or not, this mishap could be used as another data point for proponents of increased tech regulation, which given support from industry executives and Congress, could become reality in 2019 in some form.
TAKING A STAND
A recent report from Accenture Strategy found that consumers worldwide are increasingly supporting brands whose purpose aligns with their beliefs and rejecting those that don’t. The survey of nearly 30,000 consumers in 35 countries found that 62% of respondents want companies to take a stand on current social issues, and that nearly half of U.S. consumers who are disappointed by a brand’s words or actions on a social issue complain about it, with one in five vowing to never support the company again. Likewise, a Morning Consult study found that more than half of both Democrats and Republicans say that a brand’s “stance on a social or political matter is important when it comes to buying a product or service.”
The results of these studies may explain why companies like WeWork, which announced in July 2018 it would no longer serve meat at company functions, are willing to take political stands. Companies are willing to mix business with politics when they feel their consumers are demanding it, but businesses must tread carefully or risk alienating customers who may disagree.
BURSTING THE BUBBLE
While the prevalence of filter bubbles is accepted by many as fact, new evidence suggests few people actually lock themselves in intellectual isolation. A new report from the Knight Foundation found that partisans actually tend to overestimate their use of partisan outlets and underreport the extent to which they consume nonpartisan or “ideologically misaligned outlets.”
According to the study, the results show that people are increasingly viewing their consumption of media as an “expressive political act” and a signal to others of who they are. So, for companies and cause organizations hoping to achieve their objectives in policy debates, consider this new insight before crafting public affairs efforts to reach audiences that matter in the public arena, and never underestimate the importance of understanding the wide range of stakeholders engaged on an issue.