Passing on the IPO: The benefits of staying private

Rocket Software chief executive and co-founder Andy Youniss: “Quiet by design.”
Dina Rudick/Globe Staff
Rocket Software chief executive and co-founder Andy Youniss: “Quiet by design.”

Girish Navani tells two stories from his time as software developer in the 1990s: one about working for a private company, and one about working for a public one.

At Fidelity Investments, Navani recalls waiting in a conference room for Edward “Ned” Johnson III, the mutual fund firm’s chairman. Navani had been picked to demonstrate a technology project he had worked on.

“Everybody was lined up outside the conference room to greet him and shake his hand, and he surprised them by walking in through a side door,” Navani recalls. “It was just me and him. He asked a lot of questions — why we did this, how that worked.” Navani says Johnson seemed focused on continually making the business better, and carried himself like a normal person as opposed to corporate royalty.

He contrasts that with his time at publicly traded Aspen Technology, a Burlington software maker. Aspen was on an acquisition spree, buying and trying to fold in other software companies. Executives became territorial, and the company seemed to prize marketing and sales skills over engineering and product development, Navani says. (An Aspen spokeswoman says its management has changed since then, and its acquisitions increased revenues.) Navani decided that when he started his own company, eClinicalWorks of Westborough, he would do things his own way. And that meant staying private.

Today, eClinicalWorks employs about 3,000 people worldwide, developing software that organizes patients’ medical records and helps doctors get paid by insurers. A London office opened in June, says Navani, and Dubai could be next.

eClinicalWorks is just one of Massachusetts’ privately held engines of economic growth — companies that didn’t shudder at this week’s stock market sell-off. Some are household names, like New Balance and Bose, but others keep a low profile. Heard of Lexington’s Ab Initio or Rocket Software of Waltham? Didn’t think so.

Harvard Business School professor Joan Farre-Mensa says that when you look at US companies with at least 500 employees, more than 85 percent are privately held. “It’s not just the dry cleaner down the street,” says Farre-Mensa. “People underappreciated the role these private firms play in the economy.”

Why? Part of the answer is private companies don’t get the same attention from the media, largely because of their unwillingness to supply financial and other data that public companies are required to disclose. It’s almost like covering a sports league that doesn’t invite reporters to the games or publish stats afterwards.

Talk to private company chief executives, and they’re generally OK with that.

“When the management team doesn’t have to manage the investment community, that’s time we have back to focus on 100 percent of what matters — customers, staff, and the community,” says Jack Little, president and co-founder of MathWorks in Natick, which makes modeling and simulation software. “There’s not too much drama or distraction.” MathWorks has 3,300 employees around the world, and is trying to hire another 300 people in the near term, Little says.

Public companies such as Intel and Google invest 20 percent and 13 percent of their revenues, respectively, in research and development. At MathWorks, the number is roughly 35 percent, Little says. A big area of investment: software that will simulate human biology, so drug developers can better understand how their products affect people.

At New Balance, the Boston maker of sneakers and athletic apparel, CEO Rob DeMartini says that instead of fixating on stock prices, employees think about sales, profit margins, and market share. “That’s the scoreboard of how you’re doing with the consumer today,” he says.

DeMartini started his career at Procter & Gamble, the publicly traded maker of detergents and diapers. “When you’re private, you don’t have to come out and declare victory every 12 weeks on an earnings call,” he says. “And you don’t have to explain away what didn’t go as well as you’d hoped.”

Andy Youniss describes his 1,300-person company, Rocket Software, as “quiet by design.” Stealthiness does have some disadvantages. Noisier public companies can sometimes be better at attracting customers, and if their stock is headed in the right direction, they can seem like more appealing places to work for some employees. But Youniss says the consistency and stability of a private company appeals to others.

“When we first started [in 1990], no one knew who we were, and some said, ‘I’ll go to Digital or Wang or Prime instead,’” says Youniss, mentioning Massachusetts computer makers that have since vanished. “Then the dot-com wave came and people joined those companies, which went away. Over time, people look at us and say, ‘You’re still here, you’re still growing.’”

Being private does have drawbacks: a company can’t access markets for raising capital to fund big projects, and its corporate strategy may not get the same kind of vetting by directors and others that public companies get. “That can be a negative,” says Chuck Kane, a veteran tech exec who is now a senior lecturer at MIT’s Sloan School of Management.

Today’s prevailing winds, I worry, favor taking outside money at a company’s earliest stages. That could mean we’re witnessing the creation of a fleet of “go public or die trying” companies, rather than private companies that sculpt significant businesses over decades, connect more strongly to their communities, and let founders stay in control and set the course.

Young entrepreneurs “may not have heard of bootstrapping,” or using early revenues to gradually build a company, says Sherwin Greenblatt, director of the Venture Mentoring Service at MIT, which connects student startups with seasoned advisers. “They think the norm is to get a venture capital investment and go public,” he says. “Part of what we do is say, ‘There are other ways you can build your company.’”

Greenblatt graduated from MIT to join a private company founded by one of his professors, the late Amar Bose.

“Private companies can really play for the long run,” Greenblatt says. Bose, the audio-products company founded in 1964, is still going strong half a century later.

Scott Kirsner writes the Innovation Economy column every Sunday in the Boston Globe, in which he tracks entrepreneurship, investment, and big company activities around New England.
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