The Allure of Going Public
The idea of going public seems remote these days. Only now is the IPO market starting to show signs of life again. And with the Sarbanes-Oxley governance ruling now in force, the idea of being public seems especially daunting.
But for many founders of growing businesses, the idea of running a public company is as appealing as ever. Not only is it a clear route to additional capital, but it's the ultimate validation of their vision. Think "IPO" and chances are you'll still conjure up images of popping champagne corks.
Less obvious to many entrepreneurs is what it takes to prepare to go public, what the public-offering process involves, and what life is like at the helm of a newly-floated company. Many underestimate the sheer hard work of getting their companies' systems in shape in readiness for the IPO -- not to mention the rigors of the IPO road show.
It's also easy for founders to think of the IPO as an end in itself. It can be a final liquidity event for the entrepreneurs who choose to reap the rewards and move on, and it's a typical exit route for funding partners such as venture capitalists and private-equity firms. However, an IPO is simply Day One of the rest of the company's existence, and founders who still run the firms they've taken public know all too well how critical it is to be completely prepared for the offering and for the days long after the ticker tape has settled. They also have firm opinions on the characteristics of the investing partners best suited to help growing companies go public.
The trajectory of an IPO can really begin long before the planning for the road show, when a growing business brings on a financing partner. When evaluating potential partners with an eye toward eventually going public, entrepreneurs have to feel assured that an offering will happen on their terms -- that in healthy IPO markets, they will not feel pressured to pursue an offering before they're ready. They must also be clear about who achieves liquidity and when after the necessary post-IPO lock-up period is over.
With those assurances in place, entrepreneurs can start screening for the IPO experience and connections they often don't have themselves. Private equity partners that have regularly traveled the IPO road bring not only the Wall Street connections that can facilitate a smooth underwriting process, but they can also provide strategic guidance throughout. Entrepreneurs owe it to themselves to set the evaluation bar high: there is no second chance if the IPO misfires.
The stronger the "name brand" of the equity partner, the better its connections with investment banks and the less chance of a difficult IPO. But it takes two to make it work: the growth company in turn must demonstrate its attractiveness. Top-ranked private equity firms will look for a blend of top-quality ingredients: a sterling financial track record, solid market share, an expanding marketplace, advanced product, and top-notch management.
So let's imagine you've weighed the risks and benefits of going public, the IPO market is healthy again, and the decision -- your decision -- is a "go." Your investment partner has helped you tighten up operating disciplines, so you can close your books monthly and report quarterly -- as you must when you're public. The equity firm has helped gauge the right time to launch, and encouraged you to price the deal for the long term rather than seeking a run-up on the first day. (A big spike might feel good at the outset, but the right partner will explain why pricing is not all about squeezing every last nickel out of the deal.) You're spending nights and weekends getting the company's "story' right so it's persuasive for the underwriters who'll hear it.
During the road show, the tough questions from underwriters in New York, London, and Munich will go more smoothly if your equity partner has helped you refine the story and rehearse powerful answers. The right partner will also have prepped you for the many times when the discussions seem so impersonal that it doesn't feel as if it's your company any more.
Then one day you're public. The stock price is holding up well. Now, though, there are immediate SEC limits on what you can talk about and when -- a sharp contrast to just a few days earlier when you could disclose whatever company data you wanted to. The information and oversight requirements are demanding; the conflicting opinions frustrating. Sarbanes-Oxley compliance is onerous and costly. You have no shortage of outside voices -- investment analysts, shareholders' bulletin boards, and more -- who act as if they know your business better than you do. As for your employees, they're suddenly transfixed by the stock ticker, and getting them back to work can become something of a challenge until the novelty of being public wears off.
Again, the right equity partner will have coached the company's management team in how to deal with the glare of new shareholders' scrutiny, and how to handle the workload and craft the messaging necessary for quarterly earnings announcements. All founders-turned-public CEOs learn to put on their public faces, of course, but most need plenty of coaching in the early days. More than one company-builder has remarked on how hard it is to make the sudden switch from regularly talking up your growth successes to having to watch what you say until called on to deliver finely tuned messages.
Many entrepreneurs see significant upside to staying in charge of their newly public companies. Others will see a public offering as their exit ticket, possibly to free them to focus on other ventures. (Twenty percent of 2002 Inc. 500 CEOs were seriously considering selling their companies in the next 12 months, with many eager to launch another company.) Whether or not the founders of aspiring public companies intend to stay, they need to safely navigate the turbulent IPO process. The process will be that much smoother if they can lean on trusted partners along the way.
These questions will help you know what to expect from your equity partners before, during, and after the IPO:
- Is it worth being a public company these days, given the state of IPO markets and the burdens of regulatory compliance such as Sarbanes-Oxley?
- How do I know when it's the right time to go public?
- Looks like I'm the best performer in your portfolio. How do I know you won't urge me go public before I'm ready?
- Describe how you helped other businesses think and act like public companies before their public offerings
- How will you help us find and work with underwriters who understand our business?
- What are the three most critical things that company owners should watch out for during the road show?
- How will you help us price the offering?
- What are the three most critical things my management team must watch out for after the successful offering?
- How do I get my employees to stop watching the stock and get back to work after the IPO?
- What are the most important roles your firm can play in our first five years as a public company?
Martin J. Mannion is a managing partner of Summit Partners, a global private equity and venture capital firm that invests in growing, profitable, privately held companies with proven business models, records of revenue and earnings growth, and the leadership capable of sustaining that growth. He can be contacted at: 617-824-1010, or firstname.lastname@example.org.