2014 is in the books.
It’s been a pretty terrific year in the IPO market. According to Renaissance
Capital, through December 15, there have been 271 IPOs in the US this year, as
compared to 221 IPOs a year ago at this time, a volume increase of 23%. Thanks to Alibaba’s thunderlizard of a deal,
the dollars raised by IPOs this year $ 84.2 billion exceeds last year’s total
of $ 54.6 billion, by 54%%. Not bad
Ah, but look deeper and you will see that actually, roses
weren’t coming up everywhere. While 271 IPOs have been completed so far this
year, conservative estimates suggest that more than 350 companies filed S-1s, a
difference of nearly 30%. For every 3 deals
that filed and went public this year, at least one did the training, filed an
S-1 and didn’t make it to the starting line.
Of course, we need to back out those companies that filed
late in the year, targeting a 2015 transaction.
If we aggressively estimate that 20 fit that pattern, we still have more
than 50 that didn’t get the job done as planned. When you consider the time and
expense required for an initial filing, that is a big number.
What’s the difference
and what price “Optionality”?
Bankers and others can be convincing when suggesting companies
take advantage of the relatively new option to file confidentially: “Get on
file now, then choose your timing later, but you’ll be ready.” Factually correct? Yes. Good for your
business, your P&L, your employees or your IPO? Not so fast. Preparing for an IPO too soon is neither a
cost nor risk free option.
The on-going and elevated expense, distraction, loss of
momentum and sometimes embarrassment (Box anyone?) that accompany a premature
“go” decision can easily outweigh any timing flexibility benefits. Picture the horses as they are led into the
starting gate on Derby Day. There is a
reason they don’t load them until seconds before the bell.
OK, but IPOs do take
a long time. How do we know when to start?
At January board meetings, following the “year in review”
appraisals, many private company boards will have the “Is this the year to go?”
conversation. By “go”, we don’t mean
begin internal preparations. “Go” means schedule
a bakeoff and hire bankers. In advance
of those meetings, we offer 5 questions every board should ponder before dropping
the green flag.
1.
Can your sales and financial teams accurately forecast
results for the next few quarters? Did you nail your forecasts last quarter? If answering
either of these is anything other than a rock solid “yes”, then take your time.
Public investors show no mercy to companies that miss an early quarter. Once you are in that doghouse, it’s a long
slow climb out. Worse still, the brickbats that will come your way courtesy of
angry investors are mere annoyances relative to the grenades your employees, customers
and partners may lob through your door if you miss an early public quarter. A swan-diving stock disappoints, creates instability
and begs questions about management’s
reliability. It just takes one miss.
2.
Do you have the right team in place? No really, are you sure you have the right
team in place, not just for the IPO
but also for the long term? Step back
and take a cold clear look. The team
that helped you get this far may be gifted, battle-tested and may be composed
of friends. That doesn’t mean it’s the team for a fast-growing public company. Public
investors want to know that the C-suite in place for the IPO can scale the
organization. Newly public companies
juggle enough knives when adjusting to the market’s spotlight. There’s little bandwidth for concurrently
integrating new senior leaders. Save,
time money and aggravation; line up the ducks before, not during, the process.
3.
Is your business model stable and ready for public
scrutiny? Admittedly, there companies (ex. Twitter) where even
12 months post-IPO the model remains an enigma. We grant that if your business
has north of 200m active users, investors may cut you some slack. However, for most, a more stable model
correlates to a larger crowd of investors rallying around your IPO’s order book.
Are you hoping to migrate to a
subscription model? Do you see significant price changes or regulatory updates
on the near term horizon? Launch that new model or absorb the changes before you step on the IPO court. In the eyes of investors, a foot-fault of your
own making or because someone else moved the lines in a way you could have predicted,
will cripple your stock’s performance and likely your personal reputation for a
very long time.
4.
Are you ready for an
intense audit?
There isn’t even a close second. The reason most companies on the IPO trail get
thrown off course is because their audits aren’t ready on schedule. Audits won’t
be rushed. The drill down scrutiny on every last decimal point is much more
intense when your auditors know you’re preparing for an IPO. We recently
ran into IPO/ technical-accounting expert Barrett
Daniels, Managing Partner of Nextstep Advisory.
He put it this way:
The reason an IPO audit takes longer than a typical private
company audit is the dramatic increase in the risk profile. I assure you
the audit partners want the audit to go quickly but they are, and rightfully
so, going to take extra precautions to ensure the work is performed to endure
the utmost scrutiny from the company, bankers, and ultimately the SEC. The size of your audit team and number of
questions will often triple during this process making for a robust and
challenging process.
5.
Is your company really strong enough to support the
valuation you expect? For this point, we will excuse readers at
health-science companies, but for those selling products and services, not
hopes and cures, size matters.
a.
IPOs are
expensive. Bankers, lawyers, accountants,
infrastructure and other service fees add up.
While most costs tied directly to the process are “one time”, other
expenses including filings, higher legal and accounting bills and investor
relations costs will be an on-going reality. If the business isn’t able to comfortably absorb
those charges, it isn’t ready to be public.
b.
Management teams
tend to be optimistic. Bankers, reflecting experience, tend to be conservative. Your finance team may produce a model
projecting revenues over the next two years of $X and $Y. By the time bankers have
helped you “refine” them, your forecasts (for the sell side analysts) will
likely be closer $.7X and $.8Y. Expect similar treatment (opposite direction)
for your expense projections. It is
those banker-adjusted numbers from which your initial valuation range will be
determined. Do the exercise in-house to
be sure the projected valuation, based off a hacked-up model, will be
acceptable before hiring banks and
kicking off a process. The more directly
you face the conservative forecast reality, the better prepared you will be for
the go/no go decision.
Companies need not score a perfect 5 to launch, but
assessing answers to the hard questions upfront can profoundly improve the
timing and reduce the costs of the IPO process. Done right, an IPO can be a smooth, dare we
say fun, stepping-stone to success. A
solid public launch not only enhances the corporate treasury but also an
entity’s reputation, brand awareness, flexibility, competitive position and
quite possibly, the rate of growth.
The key, to paraphrase Kenny Rogers’ hit from yesteryear,
“The Gambler”, is this:
“If your going to play
the game folks, you gotta learn to play it right.”
