The Road to Wall Street
Everyone thinks an IPO is the last hurdle to success, and everyone has it all wrong. It's what happens after you go public that makes all the difference.
We've all heard the horror stories about just how inhospitable the market for initial public offerings has become. Over the past few years, the number of IPOs has shrunk to a small fraction of what it once was, and tons of respectable companies have seen their carefully conceived and road-tested offerings dismissed without so much as a ho-hum. For those that did manage to raise money publicly, only a few had stock that traded above its initial offering price. In sum, it's been an ugly, ugly world.
So what do you do if you're sitting on top of a company that's doing very nicely, thank you, but needs capital to keep growing? You don't give up. Market conditions have actually begun to stabilize a little, and 2002 could end up being a better year for IPOs in general than last year -- even for small companies, according to the investment bankers that Inc interviewed. "For companies that have their act together, where the fundamentals are good and they're growing the business ... generally, it's a great time to go public," says investment banker Michael Ogborne, director of corporate finance at Thomas Weisel Partners. "The reason is the amount of attention that a good company today is going to get on the road, because there's no one on the road." In the first quarter of this year, his firm counted just 70 IPOs in registration, compared with 120 in the same period last year.
Now that all those flash-in-the-pan dot-coms and starry-eyed founders looking to retire to Bali are no longer clogging up the calendar, market players can focus on helping solid companies with real capital needs fund reasonable expansion plans. "Institutional investors do want 'in' to growth companies and do want to invest in IPOs," says Morgan Stanley managing director Chris Pasko. "What has changed is the definition of a good growth company."
Perhaps not surprisingly, that definition is back to what it used to be. Companies need --
A vibrant industry sector. If you run an Internet or telecommunications-equipment company, you're probably out of luck. But if your company is in health care or life sciences, sectors that have held up relatively well in recent months, you're at least in the running. Software companies will likely make good IPO candidates this year, says Ogborne, because they tend to have fat gross margins -- in the 80%-to-95% range. "Our software pipeline is as good as it's been in 18 months," he says. "There are not 30 companies in it, but there are 10 really solid companies." He also expects to see deals happening in the consumer, financial-technology, semiconductor, and IT-services sectors.
Good numbers. Profitability is a must -- if not now, then definitely within a couple of quarters. As for revenue growth, investors still want to see it, but they've reined in their expectations. These days they're looking for 30% annual growth, not 300%. The minimum threshold for actual revenues depends on the industry. For a software company, $20 million to $45 million in annual revenues is fine, but a consumer-oriented company probably needs to be bigger. Life-sciences companies can go public with smaller revenues -- less than $20 million -- depending on their stage of development.
WIDE OPEN: "For companies that have their act together, it's a great time to go public," says investment banker Michael Ogborne. "There's no one on the road."
Impeccable books. In the post-Enron world, strong business fundamentals aren't enough. IPO wanna-bes have to be purer than pure. That means, for instance, being extra careful to follow Securities and Exchange Commission guidelines on revenue recognition by recording sales only after goods or services have been delivered, not when the sale is made. And it helps to have ample reserves to guard against delinquent customers. "The scrutiny is higher than it's ever been," says Ogborne. Aspiring public companies, he says, "really need to make sure that there's nothing weird or out of order in their financial statements."
Seasoned management. Twenty-five-year-old CEOs fresh out of B-school are out. Management teams with plenty of operating experience in tough times are in. And the longer they've been working together, the better. That said, if you don't already have a chief financial officer who has experience in dealing with Wall Street, hire one now.
If your company can play by these new (old) rules and you decide to try to climb Mount Everest, then it's time to take that first and perhaps most crucial step of finding yourself an underwriter. --Emily Barker
Going Public the Right Way
Popular wisdom has it that IPOs are all about timing, timing, and timing. But that's just not true. The fact is, even the best-timed IPOs can be problematic for companies that attempt to go public with the wrong underwriting firms as their partners. That's "wrong" as in too small, too inexperienced, too undercapitalized, or too far off the beaten path. That's also "wrong" as in "I never even would have thought about going public if this underwriter hadn't knocked on my door and convinced me that I could do it."
Consider the experience of Rebecca Boenigk and her mother, who started a company 13 years ago to build ergonomically designed chairs. At the beginning, going public was the farthest thing from their minds. But then their manufacturing company, Neutral Posture Inc., based in Bryan, Tex., grew so rapidly that it made it to the ranks of the Inc 500 in both 1995 and 1996. Meanwhile, the market for IPOs was thriving, and newspapers were full of accounts of everyday entrepreneurs who had managed to carry out the deals. "By then our sales were at about $12 million, and we were really thinking about it a lot," Boenigk recalls. "Among other things, it seemed like a great way to bring some cash flow to the family, keep control of the business, and help us finance some acquisitions."
