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".
Onward!
