Is an IPO the Right Thing for Your Company?
You just spent the last five years of your life working virtually 24/7/365 to build your company into one of the most respected firms in its field. Three years ago you barely could raise enough money to fund payroll and rent. Now you barely have enough time to run your business because of all the meetings with investment banking firms that want to talk about taking your company public. You hear rumors about competitors going public, and your outside investors and board members tell you to strike while the iron is hot.
You wonder what it would be like to run a public company and how it will affect your lifestyle. Based on the valuation ranges under discussion, your net worth (on paper at least) makes you feel like you just won the lottery. Serious people are saying that you could be the “next Google,” and you wonder what that would be like. You imagine yourself ringing the bell on the New York Stock Exchange.
You decide to have dinner with an old college friend, who is the chief financial officer of a public company, to share your news (against the advice of counsel). What she says makes you think.
You ask her how much stock you should sell in your IPO, and she tells you that you will be told not to sell any stock. You wonder why, especially given that your private equity investor plans to sell part of its investment, and she tells you that public investors will view the sale of stock by you as a sign that you do not believe in the future of your own company. You ask her why the same rules don’t apply to your outside investor, and she laughs and tells you that they just don’t.
Your friend asks how your company is doing financially, and you tell her that you have turned the corner and are hitting your stride. Part of the reason for going public is to reduce the amount of company debt, which is significant. In terms of your company’s financial projections, virtually all of the investment bankers believe that it is reasonable to expect double-digit revenue growth every year for the immediate future.
Your friend needles you about these projections. How is a company that struggled to pay expenses less than one year ago suddenly worth hundreds of millions? What are the assumptions used to project such rapid revenue growth, considering the novelty of your industry and product. She asks what you would say to investors in your IPO if you did not meet these projections. You tell her that everyone understands the developing nature of your industry and the risks involved, and that only those investors who “get it” and are “in it for the long term” will invest. She shakes her head and laughs again, and this time it bothers you.
She asks you why your company is going public, and you tell her that everyone—your investors, investment bankers and outside directors—tell you that now is the time. You are getting pressure from your private equity investor, who invested over four years ago, to find a way to liquidate its investment. Although you have a good working relationship with them, you complain that they are “just about the money.” You want new investors and more flexibility to manage your business. You also need to find a way to reduce or refinance the significant debt that your company has accumulated. Going public, you think, will establish your company as the industry leader. Plus, you know how excited your employees will be.
As dinner ends, your CFO friend apologizes and says that she needs to get back to the office to work on her company’s next quarterly earnings announcement and SEC filing, which are due in two weeks. As she stands up to leave, she gives you a serious look and tells you that going public isn’t for everyone. You press her to be more specific, and she sits back down and tells you the following:
- First, don’t get caught up in the moment. For most companies, the buzz of going public tends to fade away quicker than one might think. After that point, you and your management team will be left to deal with the demands and scrutiny that come with being public. You will be required to think about disclosing every significant development in your business, both good and bad, shortly after it occurs, even if there are legitimate business reasons for keeping it quiet. You and your management team will spend an enormous amount of time dealing with being public—preparing press releases, public presentations, and public filings; responding to questions from the press and investors; and meeting with analysts and large investors who can be demanding, probing, self-centered and sometimes uninformed, and who can have a significant effect on the price of your company’s stock. Simply put, she says, no one wants to be public for the sake of being public.
- Don’t fall into the trap of going public without defining your goals and considering your alternatives. Is your goal to find liquidity for investors, pay down debt, or establish a liquid market for your stock? If liquidity for investors is your primary goal, are there other buyers out there? Will being public help you raise more capital? Will having a publicly-traded stock help you acquire other companies? Where is your company in relation to where it needs to be, and how exactly will being public help?
- Stop thinking about going public as an opportunity to get rich. Your investors may look at it this way, but for you and your management team, it will be the beginning of a new and extremely challenging era. Because public investors tends to frown upon the sale of a significant amount of stock by insiders, you may not be in a position to sell much stock until years after an IPO. If personal liquidity is your goal, going public may not be the answer.
- Finally, quit thinking about going public as a goal. The process itself can be educational and eventful. But after the dust has cleared, being public can do as much harm as good. If your company hits a bump in the road, being public can make it worse. A negative development affecting your company’s stock price could well result in litigation regardless of whether anyone did anything wrong. She asks you whether your company is ready for that.
As your friend stands up to leave, she tells you that going public is an option available to very few companies and a sign of tremendous success. She says her point is to be careful and to approach the decision seriously just as you have approached every other major decision involving your company. Although going public can be exciting, being public is a challenge. Knowing, accepting and planning for this reality can make all the difference.