Why startups are skipping IPOs to build more stuff

Wonderful - Tuesday! Microsoft claims its new tool can correct AI hallucinations, but experts advise caution.

In today’s edition, we explore why startups are rethinking the traditional IPO route and how to strategically decide if your next product feature should be free or paid.

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Why startups are skipping IPOs to build more stuff

Rippling, the $13.5 billion HR and finance software company, could easily go public—but it’s not. Instead, CEO Parker Conrad is following a trend that’s gaining traction in Silicon Valley: pushing off an IPO to double down on launching new products. Like Stripe and Databricks, Rippling is betting that innovation now will pay off bigger in the long run.

What’s going on:

• All about product: Rippling isn’t just sticking to HR tools anymore. It’s rolling out corporate travel booking and procurement software, expanding its suite for small and midsize businesses. But with new product launches comes unpredictable revenue, making it tough to go public just yet. Conrad admits, “We’re not there yet.”

• IPO jitters: After watching companies like Zoom and Asana struggle post-IPO, many founders are wary of jumping into the public markets. Going public means constant pressure to hit revenue targets—a tricky ask when you’re rapidly rolling out new products.

The bigger picture: Rippling, Stripe, and Databricks are staying private longer, using fresh private funding to fuel innovation. Without Wall Street breathing down their necks, they have the freedom to focus on building better products now, hoping for bigger rewards when they eventually go public.

Should your new feature be free or paid? Here’s how to decide

Freemium strategies are great, but the tricky part comes when deciding if a new feature should be free or paid. The instinct is often to gate it behind a paywall, but that could hurt your business. Here’s a simple decision tree to guide you:

1. Does it improve retention? If a feature helps keep users engaged over time (think notifications or integrations), it’s likely a good candidate for the free plan. The bigger your free user base, the more chances you have for conversion.

2. Does it drive virality? If the feature helps spread the product (like allowing unlimited team members), it should probably be free. More users mean more opportunities for paid upgrades later.

3. Does it support paid use cases? Some free features can enhance the value of your paid offerings. For example, LinkedIn's free users make its premium services more valuable.

4. Is it a commodity? If competitors offer it for free, you probably should too. It keeps you competitive in the market.

Two key caveats:

• Complexity: If it’s a niche or complex feature, it might still be worth charging for, even if it drives retention or virality.

• Innovation: Don’t hide all your innovation behind a paywall. Your free tier shapes how users perceive your brand, so showcase some of your best ideas there.

Before making any decision, ask: Does it drive retention, virality, or paid use cases? Is it a commodity? Does its complexity or innovation warrant being paid? Answer these, and you’ll know what to do. And if in doubt, AB test!

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FOUNDER NOTES

Today’s top founder & startup reads.

Stat: 50%. That's how many SaaS companies are expected to shift their infrastructure to fully cloud-native environments by the end of 2025, driven by the need for scalability and security improvements, according to a report by McKinsey.

Quote: “AI is no longer just a tool; it's the infrastructure upon which the future of business is being built. Founders who understand this shift will be best positioned to lead their industries.” — Dario Amodei, CEO of Anthropic, at the White House roundtable on U.S. AI infrastructure​ (The White House)

Read: YouTubers like MrBeast are coming for Hollywood (the Economist)

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EXTRA READS 📚

Today’s top news & updates.

Scale AI's revenue nearly quadrupled to $400 million in the first half of 2024, driven by its data labeling services for major AI developers like Meta and Google. (The Information)

Telegram will begin sharing IP addresses and phone numbers with legal authorities for users who violate its terms, marking a shift in its privacy policy following CEO Pavel Durov's recent legal troubles in France. (Telegram)

Zoom is scaling back employee stock grants over the next two fiscal years, opting to offer higher cash bonuses to some employees instead, following similar moves by companies like Salesforce and Workday. (Bloomberg)

Qualcomm reportedly wants to buy Intel (Axios)