Top 10 Steps to IPO Preparation

As featured on Fortune Term Sheet

These days, for the typical ventured-backed tech company, the duration from founding to IPO is a full 8-10 years.  There are no overnight success stories.  It’s a serious accomplishment representing a ton of work to get a company to the precipice of an IPO.  The stakes are high to get your IPO right, and you should be highly confident that you’re ready.  To be ready you need predictability and visibility, huge growth potential and no single points of failure.  Even if your company has all of these attributes, your IPO is not a sure thing.  To make sure your IPO is a success, consider this 10 point plan.

  1. Have a CFO who understands both the business and how Wall Street works.  If you don’t yet have this person on board and need to make a hire, be sure to do so at least a year before your planned IPO.  Your CFO will play a central role in marketing your IPO and should have several quarters to learn the business and ensure she has necessary visibility.  Your CFO will also need time to build out her team and systems to support public company demands.
  2. Get to know the relevant investment banks beforehand.  Choosing the right banking syndicate is critical to the success of your IPO.  Typically companies hold a “bake-off,” a beauty pageant of sorts, where each invited bank presents their qualifications and views on IPO positioning to the board.  If you spend time in the year prior to kicking off your IPO process getting to know the relevant banks, you can consider nixing the bake-off or holding meetings with a more limited set of players.  Instead, you can select banks based on what you’ve learned.  Make sure, however, that the banks compete for your business; your leverage to ensure you get their best people and flexibility on how they’ll split the economics on your deal is at its peak before you make your selections.
  3. Select your banking syndicate based on appropriate criteria.  Choose your lead book-runner(s) based on their syndication capabilities, understanding of your business and how Wall Street will value your company.  Choose your co-managers based on the quality and interest of their research analysts.  Although the reputation and influence of sell-side research has eroded over the past several years, it’s still very helpful to have knowledgeable and highly regarded analysts following your company closely once you’re public.
  4. Use your pending IPO as a tool for attracting top talent to your company and board.  Although it will get tougher to hire top start-up talent once you’re public with options priced in accordance with your stock price, news of a pending IPO serves as a powerful motivator for talented players who may want to join your company.  Padding your expense base pre-IPO can also help keep profit expectations low in your first few quarters as a public company.  Similarly, recruiting board members will be easier when you’re private, before your IPO.
  5. Meet with public investors and sell side research analysts in the 6-12 months prior to filing your S-1 registration document.  Use these meetings to hone your story and practice responding to the types of questions public investors will ask.  Remember, however, you’ll begin to build a reputation during these encounters.  It’s critical to establish a track record of meeting or exceeding the objectives you lay out during these meetings.
  6. Boost your balance sheet prior to your IPO.  Since you’ll raise significant capital in your IPO, it may seem counter-intuitive to seek cash beforehand as well.  It’s critical that you not have any obvious “single points” of possible failure however.  Public investors are unaccustomed to funding operating losses.  If you need the cash you propose raising in your IPO, public investors are prone to either shy away or seek a very aggressive valuation.  Commencing your IPO with full coffers will give you a position of strength as you approach public investors and most will be more comfortable knowing the cash they’re investing isn’t critical to fund near term operations.
  7. Don’t invent any metrics as you market your IPO.  As Groupon famously learned when it tried to popularize Adjusted Consolidated Segment Operating Income (or ACSOI, which proposed “adjusting” out online marketing expenses), public investors tend to assume the worst when they see new metrics.  Investors will only buy your stock if they understand how to forecast your performance, so let the key drivers that help you forecast internally guide what metrics you disclose.  Keep it simple; don’t overwhelm investors with metrics that aren’t telling, even if they’re sexy.
  8. Make sure your financial projections are sufficiently haircut.  To be successful as a public company and create value over the long term, you’ll need to continually meet or exceed expectations.  Set yourself up to beat numbers and raise guidance for several quarters after your IPO by keeping a lid on expectations.  It’s not uncommon to see companies haircut their internal models by 25% when providing pre-IPO guidance to analysts.  Conversely, if you beat guidance numbers by too wide a margin every quarter, you’ll teach investors to ignore your guidance and expectations will run wild. Earning a reputation as a management team that delivers and understands how to manage Wall Street is critical.
  9. Be prepared to devote lots of time to investor relations.  I’ve polled many newly public companies, and I routinely hear that their CEOs and CFOs spend 20-30% of their time during the first year as a public company on IR.   To be prepared to devote this kind of time, you’ll need to have a strong team internally who can step in for you while you’re out educating investors.
  10. Price your deal to move.  If your stock price closes on its first day of trading up 25-50% from IPO price, you will have clearly left some money on the table.  The price you’ll pay in raising slightly less money than you would have otherwise will be more than compensated by building the right investor base however.  Seek to attract serious, long term investors who have done their homework and understand your business.  You can’t keep short-term traders from trafficking in your stock once you’re public, but the more long-term oriented your investor base, the better.

There you have it.  Keep this list in mind as you build toward your IPO!

2 Responses to Top 10 Steps to IPO Preparation

  1. Great post. I especially agree with step 5. As an investor relations person at a large public internet company, I am continually surprised at the insatiable demand from many traditionally public market-focused investors to meet with (and even invest in) later stage private companies. I believe this presents an excellent opportunity for forward-thinking private companies to shape their story and build relationships with top target investors. You can’t start this too early.

    • Thanks Dave. Great feedback. As an aside, we typically advise private companies to be careful raising money from public funds while they’re private. Private companies often opt to change their IPO timeline as they see opportunities to build value while private. Public investors are often less willing to keep their shares illiquid for long periods. So, you can end up with a mis-match in expectations. Something to think about.

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