When It's Time to Think About an IPO
By the time that Unica co-founder and CEO Yuchun Lee began to think about an initial public offering (IPO), his enterprise marketing management software company was already a success story. Founded in 1992, the firm had raised $11.2 million in private equity, using the money to hire experienced managers, speed up product expansion and extend its sales reach. Unica's revenue grew twelve-fold in the six years leading up to its August 2005 IPO, and the company had been named as one of Inc. magazine's fastest-growing companies for four consecutive years.
After all this success, how did Yuchun know that it was finally time to take his company public? In Yuchun's words, the choice reflected a combination of intuition and logic.
"It seems like there are 'left brain' and 'right brain' components to this decision," he explains. "The 'left brain' portion is straightforward. The financial market has a fairly clear set of parameters around which companies are qualified to go public from a metrics standpoint: revenue level, revenue growth rate, operating income, EPS, market potential, market position, management team completeness, and so on. Depending on the type of investment bankers one is looking for, these metrics may differ, but by and large they are determined for a given market condition."
The decision, however, was far from entirely numbers-based.
"The more subtle part of this decision is the 'right brain' portion," Yuchun says. "That is a judgment about a level of confidence, from internal operation readiness to market momentum."
The time was right for Unica in August 2005, and though the market's demand for IPOs may have slackened lately (venture IPOs raised 45% less in the third quarter of 2005 than the year previously), quality companies are still receiving financing. If you are one of those entrepreneurs wondering whether now is the right time to take the step, you should ask yourself a number of critical questions:
- Does your company have predictable revenue and earnings?
Newly public companies that miss their numbers are often harshly punished, not just with lower stock prices but with shareholder lawsuits. If you're not ready to forecast results accurately, you're not ready for the public markets.
- Is your company big enough?
Companies with market caps under $200 million may be too small for an IPO. Most initial public offerings need to be able to raise at least $75 to $100 million through stock sales and shareholder selling.
- Is your company growing fast?
Institutional investors buy an IPO primarily for its strong growth prospects.
- Do you have the right corporate infrastructure in place?
You'll need an experienced team, particularly in the CEO and CFO positions. You should be able to meet Sarbanes-Oxley requirements in the areas of accounting, information technology and control systems. Corporate governance controls should be raised to public company standards with independent board, compensation, and audit committees.
- Is the market environment right?
Even if the public market is relatively strong, you'll need to consider whether companies similar to yours are receiving financing. The financial media covers the IPO market extensively, so you can get a good sense of market conditions in your industry just by monitoring news about recent offerings. Your financial partner can also help you determine your best window for financing.
- What to expect during the IPO process
The skill set required to complete an IPO is very different from the one you use to run a company. Therefore, most entrepreneurs go into the process with limited knowledge and experience of the fnancing process. "At the onset, I had only a general knowledge of the process based on reading about it and hearing stories from others," explains Yuchun. "However, what I learned quickly is that today's IPO process can take one full year from the start of the first organization meeting to the actual IPO. Therefore, the ability of the business to sustain a long period of distraction and continue to execute flawlessly over that period has become a pre-requisite to becoming a public company today."
The complexity and unfamiliarity of the IPO process is one reason it's critical to hire experienced advisors. Seasoned board members and early investors can play a key role here for a number of reasons. Board members who have been through an IPO can guide management through the IPO process. Investors, in particular, know the players from dozens of prior public offerings. Moreover, the investment banks will work very hard to satisfy a continuing partner, such as a private equity firm, that works with them on numerous occasions.
For many companies, an IPO transaction represents a significant achievement, a sign that their company meets the market's most demanding standards. However, keep in mind that other liquidity options -- including private equity investments and M&A transactions -- may work equally well in meeting your company's needs. Before embarking on the long and complicated process of going public, you should carefully consider your company's options, evaluate market conditions, and build a team that can help you reach a successful conclusion.
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