IPO success is measured in years, not minutes
IPO mania is back! So far in 2013: 161 newly minted publicly traded companies.
The one that everyone is focused on, Twitter, will turn 41-year-old co-founder Evan Williams into a billionaire the day his company goes public, thanks to his 12 percent stake.
But Williams is part of a new generation of superstar entrepreneurs, most of whom were in elementary and high school during the dot com boom/bust cycle at the beginning of this century. Yet despite their youth, the lessons of that era have been learned: Today, it’s cool to build something for the long term and not necessarily cash out big time at the first opportunity. An IPO used to represent the quick pay-out, the culmination; today, it’s a beginning, a critical building block to repay early investors and lay the groundwork for an independent, financially healthy growth engine that hopefully outlives its founders. Longevity is suddenly very sexy.
IPOs may not always be the panacea – Facebook, Groupon anyone? Nor should IPOs be a company’s seminal event to define it. But they can serve as an important milestone along a company’s growth trajectory.
What is IPO success? Surely it’s not that first day pop that grabs a lot of headlines for the media but really means a chunk of change was left on the table for the company. Surely it’s not the minute-to-minute share-price movement, which cheapens the broader company narrative and innovation that brought it to this point in the first place. IPO success begins with a smooth transaction that first day, and then can truly only be measured months – even years – later.
But before we get there, we need to take a big step back.
The Boy Scouts’ motto “Always Be Prepared” can serve a pre-IPO company and its finance team well. The smart ones are the prepared ones, planning at least 18 months before they file, re-working finance teams and operating internally as a public company for at least three quarters before they actually become one.
Attention to detail during this critical period will never be more important. Tedious topics like finance processes and accounting principles are easy to gloss over, but the stakes couldn’t be higher. As Zynga’s Mark Pincus and Groupon’s Andrew Mason could tell you, losing control of a public company is painful and can happen quickly.
Here now, are some guidelines to consider:
Build the right team
Companies often overestimate the skill set they have within their existing finance staff. The demands on the finance and accounting team change dramatically once the company decides to go public, and not all private teams work well under these new and different pressures. For example, the quarterly process of closing the books now must happen in time to meet SEC filing deadlines. Mistakes that lead to a restatement of results or delayed filings can mean a big hit to the stock price. A study by Accenture and Oracle found 15 percent of global businesses surveyed had missed deadlines due to late accounting changes.
When building your team, think like a realtor: Location matters. If you run a global organization, you need a financial team member with local experience within the geographies where you do business; you can’t manage a finance function in South Africa from San Jose.
At the senior level, experience matters. Hire executives with public company experience, including the CFO, controller and chief accounting officer. As the IPO nears, specialists in compliance and investor relations will be valuable.
LinkedIn did that particularly well in the run-up to its 2011 IPO. CFO Steve Sordello came on board in 2007 when the company was just four years old, bringing public experience from his time as CFO at Tivo and Ask Jeeves. He was tasked with transforming the finance function from that of a startup to one that would support a global company, and to prepare LinkedIn for the public markets. He brought on board a chief accounting officer and corporate controller with public experience and continued to build out the team after the IPO. The company executed a textbook listing, thanks to exceptional planning and attention to detail.
Groupon is a different story. After the company lost its second chief operating officer in two years, just as the company was preparing to go public, CEO Andrew Mason ran afoul of the SEC’s quiet period rules. He discussed the company’s financial outlook in a memo to employees that was leaked to the media. The company’s PR director resigned because of Mason’s cavalier – some say reckless – ignorance of federal regulations. Groupon could have avoided reputational damage with proper internal preparations that might have even uncovered some of the underlying problems that still plague the company today.
Establish processes and controls
Financial controls are internal checks and balances that ensure that a company’s financial statements conform to General Accepted Accounting Principles (GAAP), which is required of all public companies. In the wake of the Enron implosion, Sarbanes Oxley was created to regulate and enforce these controls. A company preparing to go public must set up and then test the controls to verify that they work. This is where a seasoned CFO, CAO and controller can make a huge difference. Not every company gets this.
- Maxwell Technologies, an energy storage and power delivery provider, has been public for more than a decade, but still ran afoul of accounting requirements. The company announced in March that it would restate its financial results for 2011 and 2012 due to revenue recognition errors. The stock dropped 11 percent that day and lost nearly half its value as more news came out. Additionally, as a result of the restatements, it fell out of compliance with NASDAQ listing requirements. After some systemic changes, it still took the company five months to recover from the beating it took on Wall Street.
- Remember when Groupon introduced its highly unusual revenue metric in an S-1 filing? Wall Street and the SEC tend not to like “creativity” when it comes to finances, and after being forced to modify its methods, Groupon’s actual revenue was cut in half.
Software tools can help companies spot bottlenecks and weaknesses in their process and fix them before you’re in the public eye. If you are considering such tools, you will want them in place and running for several quarters before going public. Cisco has long been a model for how quickly a company can move if it’s fully prepared: it reported its full-year results for fiscal 2013 on Aug. 14, 2013, just 18 days after the year ended, and it filed its 10K with the SEC on Sept. 10, a full two weeks before the formal deadline.
As a private company, you have the benefit of practicing outside the public eye. Use the time to get the systems right.
It’s likely that you’re already closely following public competitors. Go a level deeper and analyze what they are disclosing to public markets. What are the key metrics? How do investors value the company? You should then track these same key metrics internally and be prepared to answer questions about how you perform versus competitors. And most important for the finance team: Understand proper – and best practice – forecasting methodologies. Wall Street may dislike financial “creativity,” but it detests bad surprises.
Be a realist
As the management team goes on the road to meet with potential investors, don’t let the market excitement get ahead of reality. You must strike a very fine balance during the roadshow – get investors excited for the company’s story, but don’t set unrealistic expectations. You must answer to these new owners in the coming months and even years. There may be a host of bankers and lawyers involved with all of this, but the buck stops with you, the management team, that got the company to this point in the first place.
Facebook learned the hard way that market enthusiasm has its limits: the company put out too many shares and disclosed to a limited number of investors that its quarterly outlook was weaker than expected. These two factors were exacerbated by Nasdaq glitches that caused the most-anticipated IPO of 2012 to become a poster child of IPO mishaps.
Preparation and attention to detail will translate into something truly worth celebrating; but remember, the IPO isn’t a culmination, it’s the beginning of what should be an exciting, and hopefully lucrative journey. Prepare, and enjoy.
Image via Wikicommons.