Oh ye of little faith.
Here you were thinking we were only offering up Part 1, when in fact we
just figured we should give everyone time off for the Fourth. On with part two: Items 6 through 10 of mistakes newly
public companies should really - no REALLY. try to avoid.
If at all possible, do not:
6. Change your story: If you go public as a SaaS provider with
predictable earnings, do not even think of repositioning to be a mobile, big
data play because those multiples are higher, or for any other reason. Investors will be rightly alarmed if during
the first couple of quarters as a public company, a recent IPO:
o Changes
the model or strategy communicated during the roadshow
o Changes
management or
o Makes
a major acquisition (with exceptions)
Early changes to the business model or strategy communicated
during the IPO scare investors. They took of leap of faith and invested
with your risky offering of a new issue because they literally bought into the
story you told on the road. Not
surprisingly, they expect you to stick with that plan now that their money
lines your company's bank account.
Investors also expect companies to have the right executives
in the right seats before the IPO.
Swap a key player out too quickly and your new shareholders will cover the
field with yellow, if not red, flags, reasoning that early changes signal big
problems. The same often,
although not always, applies to material acquisitions in the early going unless
a) you were clear in the S-1 that acquisitions were a likely use of funds or b)
you can make a very strong case for why the move is brilliantly opportunistic. Don't let your new investors think that
their money is burning a hole in your pocket, or that you are taking your eye
of the main business. Know that even
though they bought at the IPO, they are not really invested until they see several
quarters of consistent, "as billed" performance.
In the words of one top institutional shareholder with whom
we recently spoke, “the first 6
months are the honeymoon. Management
should be solely focused on running the business and delivering. Small R&D
acquisitions are okay but nothing big". Deliver what you promised early and the credibility earned
will carry you a long way down the road.
7. Overwhelm or underwhelm with metrics. Investors need to be able to track a
young public company's progress and really
understand the mechanics of the model.
That means they need to follow at least some of the key indicators that
you watch; those that don't appear on any formal financial statement. Too little info equals too much
risk. However, here's where it
gets tricky. It's also possible to
share too much. Companies that
release pages of data points end up wasting investors' time, as the chaff/wheat
balance is out of whack.
Smart companies put significant effort into determining the
right balance for sharing information that will be genuinely helpful to
investors but not terribly useful for competitors. Investors will always clamor for more - or at least the same
info that the competition shares, but companies should define their own playing
field rather than letting competitors do so. The key is to explain why you give
the metrics you do AND to be equally clear about why sharing others will not be
helpful.
Why? Here's a recent example. In our conversations, investors singled out PANW as a company
hurt by its lack of clarity. When
the company missed street expectations last quarter, investors lacking the
right metrics, could not determine the root cause of the problem. Long-term investors expressed
frustration with the company's lack of transparency and that made a bad
situation worse.
Portfolio managers generally believe that a company providing
fewer metrics than its peer group is less investor friendly, believing that reduced
disclosure creates uncertainty and volatility. They may be right or wrong on this as, when you think about
it, missing more target numbers may not actually be better than missing fewer,
but hey; it's what they believe. So, be ready. Study
what peers disclose and if necessary, be ready to explain why you have chosen a
more relevant path.
8. Talk about your valuation: This one is simple. Management should,
in the words of Taylor Swift, never, ever, ever talk about valuation. Talk about the company's prospects,
talk about products, technology and the go to market strategy, talk about great
new hires and customer wins, but do not talk about the valuation of your stock.
That's sort of like lecturing Coach K on game strategy. The audience knows exponentially more
about this topic then management ever will. Management should talk about the business and let investors decide
if a stock is a good investment
9. Fail to provide focused and informed IR: IR really matters.
No let us restate that: if you
have good, reliable, informed IR, it can really matter. Don't take the easy route or under
invest in the function internally. Investors tell us that short-term thinking will
come back to bite you if [when] the going gets tough as they will seek
reassurances from spokespeople they know and trust to be in the loop. Better plan: get to know your top
investors and develop a strong, direct dialogue. You will learn as much from them as they do from you. There is no substitute for having a
strong, always-in-the-know, dedicated IRO - just ask your investors.
10. Be
ubiquitous: Most young
companies are invited to speak at one or more conferences sponsored by each and
every bank on the cover of the IPO prospectus. They are also invited to speak
at an endless list of other investor events and constantly encouraged to do
non-deal roadshows. In the early
quarters, if the story hasn't changed much from the original pitch, just say "No".
Investors want you focused on
delivering results, not speeches. Even after the first few quarters, trust
that generally, less is more. After a few presentations, the returns not only
diminish, they approach the horizontal axis. Attend a couple of key investor events each year to keep your
investors informed and as a thank you to analysts for continued coverage. Supplement that with a couple of
non-deal roadshows. Other
than that, meet with investors when you have something new and interesting to
say. They will appreciate that you
are using both your and their time well.
We pulled this list together based on many conversations
with top investors and seasoned with our own experience. We've watched many companies learn the
hard way. Here's hoping this short cut is helpful.
Oh, and one more thing. In addition to interviewing the buyside regularly, we run a business. Therefore this
is the part where we remind you that if the unexpected happens, you unavoidably
stumble or did not read Parts I and II in time -- feel free to call us for help
with Part III “How to get a good company back on track in the public markets.
