Let's say you have a profitable technology company, founded thanks to funding provided by venture capitalists or another small pool of large investors. You have one extremely successful product and are looking to branch out to a second. You've hired staff rapidly to support this initiative and to keep your bread-and-butter product rolling. But because your funding is limited and your staff is growing, your average employee salary is considered sub-par in the marketplace. Because of that and because your second product hasn't started selling yet, your margins are falling. Your investors are getting nervous. Still, you do have that successful product, you are still making a solid profit, and you have positive buzz for your second product. What's the next step?
Well, suppose you decide to launch an initial public offering (IPO), which essentially means that you're going to go from having very few large investors to a larger number of smaller investors. This will get you out from under the thumb of your very few investors, so that's an advantage. And you'll have an expanded funding pool from which to retain your best employees and bring in more industry pros, and that's good too.
What does this have to do with anything? It turns out CCP is mulling an IPO.
In this interview, CCP announced $66 million in revenue for the year 2011. That's a pretty substantial increase from their $57.4 million in 2010. Their cost of sales last year was $6 million and their operating expenses were $46.6 million. Salaries last year were $21.3 million, but CCP had a pretty significant lay-off in 2011. So let's assume that cost of sales went up a couple million (they were paying outside firms for marketing, particularly web marketing, last year), and that operating expenses were reduced $4 million total between the lay-offs and other cost savings.
That means CCP ended the year with about a $15 million profit, more or less.
Of course, everything but the revenue numbers are guesses. We won't know the real numbers until someone in Iceland picks up CCP's financials for the year. If someone on FHC doesn't think of it, I've got an alliance-mate in Iceland now and I'll ask him to. Or maybe the financials will be published before Fanfest this year (hint hint).
But even if they are guesses, those numbers are probably pretty good guesses. That means the $15 million profit was probably consumed paying off their $12 million capitalization loan in October. That would seem to confirm that without the lay-off, CCP would have ended the year in the red.
So yeah, it's not surprising that they're thinking about an IPO and getting out from under the cycle of those loans.
If CCP goes this route, though, it'll be very interesting to see what they do with those initial shares. Go back to the first paragraph of this post and read it again. It applies, almost word for word, to lots of other companies, notably Microsoft and Google. We'll use Microsoft as our model.
After being founded in 1975, Microsoft operated as a privately-held company for almost ten years before its IPO in 1986. Microsoft initially had many of the problems CCP has, notably with employee pay. Well into the 90s, it was quite common for them to recruit large portions of the Computer Science graduating class of local universities, burn them out over two or three years, then replace them with new incoming grads. They even built and used a software development model that could sustain itself against this continuous churn.
But over time, Microsoft's management learned that you can't sustain and grow your business without consistent leadership. How to solve this problem, then? How do you retain strong leaders in your company without a lot of money to pay for them? The answer was shares in the company. Initially, these "shares" were outside of the true stock market structure. They were in the way of promissory notes that could be replaced with actual shares later when Microsoft eventually did have its IPO. But Microsoft put off its IPO for years, resulting in more and more and more of these "shares". It got so bad that rumor had it that employees were buying and selling these shares amongst themselves for mutually agreed-upon prices. At that point, the rumor goes, the U.S. Securities and Exchange Commission stepped in and suggested to Microsoft senior management that it was time to go ahead and have that IPO. So Microsoft did it, a little bit reluctantly.
And in the process, made thousands of on-paper millionaires overnight.
That, of course, created its own morale and retention issues. A persistent urban legend started going around that employees that were a little bit sick of the company would start wearing buttons or t-shirts that read "FYIFV"... "Fuck You, I'm Fully Vested". That meant that that employee's stock had fully matured in value and the employee could leave Microsoft at any time he liked and still remain financially independent. The buttons and shirts were almost certainly apocryphal, but the morale problem was real enough. As a manager, you can't treat a rich employee the same way you can someone who is reliant on his or her pay check.
Communication from upper management have always been a big problem at CCP. So has equity and fair treatment between employees from managers. Virtually every review of the company at Glass Door mentions these factors, and lots of ex-CCP employees mention these problems. CCP is often more of a fraternity house "boy's club" than a professional business (though this seems to finally be changing). I kind of shudder to think of this kind of morale and equity problem mated to the big pile of money that an IPO could bring in.
So, if CCP does seriously ponder an IPO, it will be interesting to see how the equity problem is handled, particularly since a public company has to be public in how they do so... In my opinion, it'd be smart to fix the equity and communications problems first.
Of course, it's also possible that CCP has already started distributing paper "shares" in the company, the same way Microsoft did...