Ready, set, go
With numerous companies in IPO registration, how do you make your company stand out from the crowd? Plan ahead, say the experts.
When Chairman and CEO Randy Foutch set up Laredo Petroleum Holdings six years ago, he started planning to go public. He’d done the same thing before, with three previous exploration and production startups, but opted instead for private sales.
This time, however, he went the distance and went public in December 2011.
“The size of the prize was so big,” he says. “We felt this was a company that deserved, for the shareholders’ sake, to be run and financed for a number of years to come.”
Backed by private equity, and understanding the need for a return on investment, Foutch frequently starts his companies with the eventual goal of going public. In fact, he recommends starting the process on day one.
“Preparation is critical,” he explains.
You need to be ready; you need to be ready early.
Going public is costly and time consuming, so having the right systems in place early on can make all the difference. At Laredo, this meant looking back, even at his previous companies, and focusing on where they had performed well over time, where not, and why not.
“You want to make sure that the story you’re telling is something you can actually perform on,” says Foutch.
“As a private company, the failure to perform for a quarter or so wasn’t that critical. You lose a lot of that flexibility and you lose a lot of that luxury as a public company.”
Wanting to be able to run Laredo in a public environment meant starting with independent boards and fully functioning board committees, as well as audited financials.
“We wanted to make sure we had the governance,” he recalls. “We wanted to make sure that the process to go public wasn’t hindered by having a material weakness crop up.”
And that’s a big time commitment. Foutch says the senior management of companies planning to go public should block out days in their calendars during the following year for earnings calls and investor conferences, and then see how much time is left to operate the core company.
Daniel Oh, President and CEO of Renewable Energy Group, an advanced biofuels company that makes diesel fuel out of agricultural waste products, took his company public in January 2012. He agrees that early foresight is key.
“We’re most likely to have access to capital and most likely to have the greatest number of options if we build the business to public-company standards,” he explains.
You lose a lot of flexibility as a public company.
This takes preparation, he says, “all the way down to how you organize your subsidiaries. Are you going to pay for an accounting package so that you maintain arm’s-length transactions? Do you hire people based on the ability to [build the business to a public-company standard]? You need to be ready; you need to be ready early.”
“If your management team and your business don’t have the maturity, you’re going to have a really hard time [going public] because, really, we just began our hard work when we became public,” he adds.
“We used to have a bunch of flexibility, a bunch of optionality. We could change our mind, we could do all these other things. You give that all up. But the rewards are high for the business because you can get capital.”
Get your house in order
Deepak Sindwani, a partner with Bain Capital Ventures who serves on the boards of four of Bain’s portfolio companies, stresses the importance of not jumping the gun in terms of timing. He suggests getting the company’s operational house in order 18 months to two years before listing to make sure all the systems are in place.
Key to a successful IPO, he claims, are consistency on the revenue side and on the business model side. Telling a story about getting from A to B is important to investors, as well as proving you won’t veer off course.
“We’d rather have companies that consistently deliver, maybe at a slower pace,” Sindwani says, “than ones that are whipsawing the markets or the investors themselves.”
Anyone looking to go public in the near future should be extremely confident in their own numbers, consistency and predictability.
“Clearly, the current market is very uncertain,” he explains. “There are tax changes happening, and Europe is still volatile, so there are macro effects that can affect public offerings, things that have nothing to do with your own performance.”
“One thing we’ve been advising companies is to take a look at your constituents,” says James Markham, EY’s Tax Leader for Strategic Growth Markets, which helps high-growth companies prepare to go public.
“If you are PE- or VC-backed, and investors have some skin in the game in terms of capital gains, they may be pushing you toward a transaction. Whether the timing is right from an operational standpoint is a different question, but if you understand the motives of your investors or your constituents, you’ll make a better decision.”
When he was a child, Daniel Oh dreamed of being the CEO of a public company.
Today, he concedes that a childhood dream — or the perception of going public as being “cool” — is not reason enough to go through the process. It has to be the right path for your business.
For Renewable Energy Group, it was. “The process was well worth going through,” he says, “and we’re glad we did it.”