What Tech CEOs Really Need to Know, Pre-IPO
Filing for an IPO is one of the biggest decisions a CEO and company can make.
I have worked on more technology IPOs than probably any other venture capitalist. Throughout my career, I have been intimately involved with more than 100 initial public offerings. When preparing for an IPO, you will be bombarded with information from your accountants, lawyers, investment bankers and investors. I believe these seven tips should be your top priorities to ensure you are on your way to a very successful IPO:
Time it right
Timing is everything. Think about where your company will be in a year or 18 months, not where it is now.
What many don’t realize is that you don’t have to be completely ready to go public when you start the process. Consider where your business will be in 12 to 18 months. Use that period to prepare. The reality is, that’s how long it will take.
Hire the very best chief financial officer
Often I meet with later-stage companies and am surprised to see that the one seat missing at the table is that of a CFO. There is a perception that a public company CFO can be popped into a team at the last minute, which really understates the importance of this position. The CFO is one of the most senior executives, and needs to be driving the initial preparation for an IPO.
When conducting your search, it helps to find a CFO with public company experience, but there are many who can rise to the occasion. The IPO preparation process can be grueling on many fronts, and a strong CFO can ensure you and your company are ready.
Take advantage of the favorable regulatory environment
There are two key aspects to the JOBS Act that are critical to take advantage of:
Test the waters
Historically, a company had to gauge the reactions of institutional buyers through feedback from its lead investment bankers. Many CEOs don’t know that an essential component of the JOBS Act is the option to meet with public investors for initial feedback prior to the actual roadshow. While investment bankers offer a reasonable proxy, you can get truer feedback from soft-selling a selected group of institutional buyers as a trial run.
To truly test your company and your story, poll a broad population of investors. There are some bellwether investors in New York, Boston and California that typically pre-public CEOs meet with in advance of their IPO. But to get an even better sample of real investor opinions, I recommend extending the tour to other parts of the country. The Midwest is a great choice. You will glean a larger variety of feedback and be better equipped to gauge if your company is feasible and attractive to a broad new group of investors.
Keep your content confidential
Growth companies are understandably concerned about revealing their metaphorical hand to competitors, suppliers and customers when filing — unless the IPO process is almost certain to move forward. Even revealing certain company information (e.g., CEO compensation) to all employees can be awkward. This understandably creates cautious management teams, and deters companies from filing for an IPO.
The JOBS Act allows a confidential filing so that you can avoid revealing all of this information until the IPO is really happening. A company can announce a filing but keep the contents and details of the company confidential until the time is right.
Cherry-pick your bankers
Look for individuals who have the skills and knowledge to bring value to your company and who know your industry.
I like to think of the investment banking fees, for the IPO transaction, as the company’s money. In a $100 million IPO, this is $7 million (the standard “spread” is seven percent, except for very large offerings).
Build a great team, one that will be highly motivated and effective for you in the aftermarket. You don’t need a bunch of big names on the cover of the S-1.The reality is that the true book runner (left lead managing underwriter) carries the bulk of the load. So, after strategically selecting that left lead position, fill out the rest of the team with bankers that have skin in the game and will hustle to get you the best result. Pick the banks with the best analysts in your industry.
Price it right
I have learned that maintaining momentum is essential to a successful IPO — especially at pricing. Taking a quick look at the headlines of recent IPO pricings — it is clear which companies did well on day one.
You want to price at least slightly above the range, or revised range, to prove it’s a successful deal. If the size of the deal and the price range are set too high, it sets unachievable expectations. As exemplified by a few large IPOs that priced in 2012, the deal becomes viewed as a failure and a disappointment when it doesn’t meet those expectations. Keep the psychology of momentum in mind: Pricing it right from the start reflects well on a company’s early future as a public company.
Empower a small, focused team
You would not get the whole company involved in a Series C fundraise, so do not get them all involved in the IPO.
Your best bet is having one person or a small group take a cut at the first draft of the S-1. Calling on a large committee to draft an S-1 is a monumental waste of time by highly paid people. Having too many cooks in the kitchen will become an unnecessary distraction to your employees, and a time sink for management.
Start acting like a public company — now
When is that decisive moment that you start acting like a public company? It is now.
Make sure you have a strong cash position. If you do need to add capital to bolster the balance sheet, bring in a later-stage investor who brings additional credibility and complements your existing investors.
The approach to budgeting and forecasting typically needs to be reworked. Most private venture-backed tech companies have stretch budgets that drive toward maximum growth. Often, actual results fall short, and this isn’t unexpected or viewed as a big problem — everyone knows the game. As you approach the IPO, you need to shift to an achievable budget and forecast that the CEO commits to the board.
Before the IPO filing, begin implementing the metrics you will use as a public company. Don’t create new metrics; go with those that are understood by Wall Street and are meaningful compared to other companies in your sector.
Sandy Miller is a general partner with Institutional Venture Partners (IVP). He focuses on later-stage venture and growth equity investments in technology, Internet and digital media companies, and has led investments in AddThis, Carbonite, Care.com, Constant Contact, Data Domain, Datalogix, FleetMatics, LiveOps, Merchant e-Solutions, Ngmoco, On Deck Capital, One Kings Lane, Placeware, SkyStream Networks, Supercell, US Internetworking, Vonage and Zynga. Reach him @IVP.