Should I Take My Company Public?
When Joe McCall started Clarus Corp. (#95), in 1991, he knew he wanted to found a software company, make it successful, and then take it public, leaving company operations to someone else. "That's what I do," McCall says. "I see a business opportunity. I start companies, staff them, fund them, then I hire a management team, turn it over to them, and go do another one."
Clarus (formerly SQL Financials International Inc.) is one of four companies McCall had started. It was a prime candidate for an initial public offering. It was going to need both an injection of capital to expand and added visibility to compete. McCall's first step in preparing for the IPO took place in August 1995, when he promoted Stephen Jeffery from vice president to president. In December 1997, Jeffery - a Hewlett-Packard veteran - took over the chairman's job from McCall, and in February 1998, McCall handed over the title CEO. The reasoning behind those moves? When it came time for the road show with potential investors, McCall didn't want them sold on one executive - himself - who was going to leave after the IPO. The underwriters agreed that the spotlight should be on Jeffery, the man who would be running the company.
"Management has inside guys and outside guys, and when you are a private company, you don't need outside guys," says Tom Berquist, a senior software analyst at Piper Jaffray, one of three underwriters for Clarus. The company's controller, for instance, was plenty good with the numbers. But he wasn't the right one to sell the company to investors and analysts. Clarus again turned to a headhunter, this time to find a chief financial officer who could effectively talk to the outside world.
"We set out at the beginning of 1997 to behave like a public company, to be very rigorous about it," says Jeffery, who by then had also brought in two executives to head the consulting and customer-service units. "We went through six quarters of 100% predictability before we took the plunge. Wall Street - make no mistake - will kill you if you miss."
By late May 1998, the IPO paperwork was done and the company was ready - and the market was off. Clarus's management and board of directors had been hoping for maybe $12 a share, but that seemed unrealistic by then. They agonized. How much difference would it make to wait just a quarter or two? The payback might be better then. But it might be worse.
While the IPO process is months in the making, the go or no-go moment happens within hours of the stock's hitting the Street. On May 26, at 6 p.m., Clarus's board of directors, including McCall and Jeffery, made the call. More than anything - more than the hope of a bigger payday if they waited - the company needed to worry about business, not stock offerings, Jeffery said. "We could have delayed and justified it. But we had a lot of momentum, a lot invested in terms of time and effort. We wanted to get it behind us." Clarus's public offering would be a go.
The company sold 2.3 million shares at $10 a share. Clarus's stock dipped from that opening to 7 5/8 a few days later, rebounding through June to crest at 9 5/8 in July, and then dropping steadily to new lows in August. While that is certainly not a sensational performance, taking the company public was the right thing to do in Jeffery's eyes.
"It's a tremendous boost," he says of the increased visibility that being public brings. "When you are competing - as we are - with companies like Oracle and PeopleSoft, the card they play against you is the 'viability' card. Your name gets circulated a lot more. The awareness creeps up. It's incredible the validation that going public gives you."
But, as McCall notes about preparing for the IPO - which he had originally expected to take place in 1996 - "it is a lot harder than it looks. There is nothing easy about it."
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