Even when an IPO is not on your short-term agenda, planning well in advance is a proven strategy to maximize the value of your young company. Jacqueline A. Kelley and Bryan Pearce of EY's Americas Venture Capital group explain the steps you need to take, and why.
Planning pays off
Companies that start preparing for their IPOs 12 to 24 months out typically outperform the market. That's what EY has learned in its experience working with young, venture-backed companies. In Venture Capital Review, EY's Jacqueline A. Kelley and Bryan Pearce point to 10 steps that can help your high-growth company enhance its value and even take advantage of an unexpected IPO window.
- Operate like a public company long before your firm becomes one.
Long before your company engages in the four phases of the IPO ramp-up — due diligence, drafting, SEC review and marketing — time should be spent on planning and processes. Businesses intending to go public in the next year or two should develop a formal plan and timeline. Work on the legal, financial, technological and risk management infrastructure required of a public company. And address key financial and reporting issues, including accounting for stock option issuance and revenue recognition.
- Keep an open mind.
Every year, venture capitalists achieve an exit for significantly more of their portfolio companies through an M&A transaction rather than an IPO. Though such private M&A exits may lack the prestige of a stock market listing, they can be an effective and less costly vehicle for raising funds and realizing an optimal company valuation. There are multiple alternatives such as sale to a private equity firm or to a strategic buyer; partnerships, joint ventures and strategic alliances; or alternative liquidity options, such as Rule 144A placements.
- Convene a superb team.
The markets look for companies with high-quality management teams. No wonder strong IPO performers typically begin the process of strengthening their management team a full one to two years in advance of an offering.
Your company also needs a strong set of external advisors with significant experience in taking companies public. A well-regarded team of financial and tax advisors, auditors, attorneys and underwriters carry significant weight with investors as do your choices of CEO and CFO. The CFO must be able to communicate the company’s financial results effectively, and the CEO must be able to articulate the company’s vision and strategy, as well as execute the business plan and forge good relationships with external stakeholders.
- Assemble a solid infrastructure.
The right systems, procedures and controls must be put into place well before an IPO. Information systems need to align with your business objectives and with critical reporting requirements. Management should have the information tools to support good decision-making and quick responses to questions from analysts. On this front, we recommend that companies prepare their financial statements as if they were already public for several quarters prior to the IPO.
- Establish excellent corporate governance.
The board of your IPO-bound company should include a mix of audit, governance, compensation and compliance specialists, as well as experienced executives. Typically, small-cap company boards should aim for five to six outside directors with a minimum of three independent committees (audit, compensation and governance/nominating). Directors must commit 200 hours or more per year, and your company must be able to draw a definitive line between directors’ duties and the responsibilities of executive management. Finally, develop a deep executive bench and an appropriate succession plan.
- Inform and communicate to potential investors.
A highly skilled investor-relations professional — whether in house or on retainer — is essential to help guide your company’s strategic communication plan in preparation for an IPO. He or she should be able to draw the market’s interest and attract sell-side coverage and potential investors and manage the risks associated with the external messaging. Once the company has gone public, he or she will have to continually retell and fine-tune the company’s story and the investment value proposition.
- Develop a brilliant sense of timing.
Instead of asking whether the stock market is ready for it, your company needs to ask whether it is ready for the stock market. Input from a variety of external advisors can help your board members and management develop a realistic IPO timeline. It is important to communicate this expected timeline to key stakeholders.
Even when the company is ready, it might be necessary to delay the IPO if the markets are unfavorable or there is a glitch in the offering process. But when an IPO is timed perfectly, the company can price its shares to yield an optimal valuation and the highest possible investor returns. Every IPO-bound company should be prepared to quickly enter into the registration process in the event that a window of opportunity appears.
- Orchestrate a successful road show.
The pre-IPO road show, during which the CEO and CFO present your company to large investors, typically requires between 8 and 10 long days in the US and a few days in Europe or Asia, often with visits to multiple cities in a single day.
Despite this grueling schedule, the company’s messaging must remain consistent. A well-designed road-show presentation, supported by an “elevator pitch” and talking points, as well as several formal rehearsals, is essential. Pre-IPO companies often consult professional presentation training specialists to prepare CEOs and CFOs. To drive a strong post-offering performance, your company’s message must continue to resonate, even as the investor pool expands.
- Attract the right investors and analyst.
At first, many newly public companies enjoy high share prices fueled in part by investors’ interest and press coverage. However, unless this interest is carefully maintained after the IPO, initial euphoria will fade. Actively cultivate analysts and shareholders, attend conferences and initiate non-deal marketing visits. Engaging this group prior to the road show can help drive value and avoid surprises.
- Prepare to prove that you are true to your word.
Pre-IPO, your company should clearly define the parameters and metrics that analysts and investors can use in tracking the progress of the business. Once the company goes public, the real work begins: management has to prove its credibility to investors by using the proceeds of the public offering effectively and executing the business plan.