Tuesday, May 10, 2016

Perspectives on the IPO from Recently Public Company Founders and Management Teams; It was Tough but Being Public is Well Worth it!

As quiet as it has been, we have no doubt that the IPO market will be back.  As we have said before, we need a company or two with good numbers and brave management to break the ice. SecureWorks [SCWX, NASDAQ]  doesn’t really count as it was a spin-out from a larger entity not an A-round-to-IPO-story. But one of these days, some company on file will convince “oh no, let someone else go first” bankers to hit the road(show), take the plunge and bring back the IPO.  Yes for some, that may be a challenging call as they are likely to have to accept the new catch phrase “An IPO – It’s the new down round”. The sky-high private valuations on more than a few will have to face the cold-hard reality of a discerning public marketplace that is unwilling to "price for perfection" right out of the gate.
But no need to dwell on those tough details here because whether we see the transaction in 2016 or beyond, 100 or so private company management teams recently joined us at the New York Stock Exchange to learn about the markets, what it takes to go public and what steps they might take now to make the process easier “then.”
Leslie moderated a panel of recently public company management teams including Peter Bauer, the Founder, CEO and Chairman of Mimecast, Jennifer Moyer the CFO of Alarm.com and Matt Kaminer the General Counsel of Instructure. The hope was to share the hard-earned wisdom of those who had recently gone through process with those for whom the experience is yet to come.  The overriding message from those who have run the gauntlet to those thinking about it: “It’s tough but well worth it”.
Below, a straightforward summary of the questions and answers from that panel: These are not our thoughts; they are the words of wisdom from the panelists.
What was the single best thing about the IPO process?
The single best thing about an IPO is the pride and morale lift across the entire company. The feeling that we are good enough to be playing in the big league has been a huge confidence builder. I was worried about the stock price being a distraction but internally I spend very little time on that as employees are focused on execution and have taken a long term view.
What factored into your decision to peruse and IPO?
First, the transparency of being a public company is a big advantage when selling to enterprise customers and establishing partnerships. The IPO can be quite a positive event for the company from that perspective. There is a tremendous amount or publicity and awareness that can benefit any company really and we were shown how to optimize the process. So the IPO was the right thing to do for the business at the right time for the company.
Second, investors expect a path to liquidity—if management/founders want to maintain control over the destiny of the company an IPO is the only way that keeps the management team in the driver’s seat. Other alternatives-- Sale you lose control and become part of a bigger animal and a PE deal is similar you cede control as they cut growth investment and bring in their own management. If you believe in the long term potential of your company and IPO is the only viable declaration of independence.
How has the IPO process changed your company?
There is a lot on compliance and legal stuff involved in an IPO but at the core, a large portion of the work makes you a stronger company. We had to focus on separation of duties, process, clear lines of communication and accountability, on accuracy, removing risk, forecasting and planning. The IPO process tightens everything up. It is great to lead a company that has gone through a transition to a public company. We have a more finely honed ability to execute. What used to be best efforts is now and intensely analyzed and high conviction yes or no.
What would you do differently if you had it to do over again?
The one thing I would do differently is the have dual class stock to keep the focus of the company on the long term. The public markets seem to be irrational at times and although we have put all the protections in place like poison pill and staggered boards, dual class stock would provide and extra piece of mind that the focus will remain on long term value creation.
As a CFO the one thing I would do differently is to have an in house investor relations function from right from the IPO day rather than outsourced IR. The biggest surprise to me has been how little public investors actually know about the company and the time and effort involved in educating them. We chose an outsourced solution just for convenience at the time. A focused internal investor’s relations function is something I would have invested in earlier.
What tip would you give the audience on how to prepare?
Spend time with public investors and research analysts well in advance of the IPO to educate them on the company and learn from them is incredibly valuable. That said, make sure your company presentation is public company ready and that management is prepared well for the interaction. Investors will take notes and remember everything you said so pivoting later is difficult and a bad initial impression can lead to a rejection at time of IPO. Make sure you are very well prepared.
Spend time with bankers but not too much time. There is value in getting multiple perspectives; they are super smart. Don’t be blinded by big brands, there were some who didn’t get it or who were too busy to give us attention.
What are the keys to success?
You must set conservative expectations and outperform them. The ability to beat and raise is very important and takes tremendous practice; setting expectations correctly is an art. As a management team we were coached to think of the cadence of quarterly reporting like chapters in a book—it is your story playing out on a quarterly basis and each quarter must show some evidence that your story is working and working well.
Do you need to have been a public company CEO, CFO or GC to take a company public?
A company does not need public company experience to successfully navigate the IPO process. More important is a passion and vision for the business. Public investors like founder led businesses as long as the founder has built a deep bench of surrounding experienced management teammates.  CFOs need good judgment, a deep grasp of the financials and a hopefully, an affinity for talking about the business with investors. The General Counsel needs to know how to build and lead a legal department.  Advisors including IPO experts, experienced legal and accounting firms can provide the expertise needed to get through the IPO process and to launch a successful post IPO public company strategy.
Final advice from one of our founder/speakers: “do not limit the company's potential because of your own doubts about your ability to be a public company CEO. If it is in the best interest of your company it is certainly something you can do".