How to Be a Public Company CEO

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I’m out here at the Pacific Crest Technology Leadership Forum in Vail, Colorado this week. The 600 attendees here are a mix of public institutional investors, hedge fund managers, investment bankers, public company analysts, venture capitalists, public company CEOs and CFOs, and private company CEOs and CFOs.

The investors are here to meet the management of the public and soon-to-be public companies and to build relationships with the people that feed them data about these companies–the analysts. The analysts are here so they can publish research on these companies to sell to the investors. The investment bankers are here to build relationships with the management of companies they hope to sell, advise on acquisitions for, take public, or do follow-on offerings for. The CEOs and CFOs are here so they can raise money from the investors and get covered by the analysts. It’s a fascinating dynamic.

I’m learning how to be public company CEO. Here are some of the things I’ve learned.

The Process of Going Public

The general process of taking your company public in the United States is:

1. Build your company to at least $40M in annual sales (the sort-of-hard ‘takes 7 years’ part).
2. Reach breakeven or profitability and have solid positive EBITDA in sight.
3. Invite investment bankers to pitch you in what’s called a ‘bake-off’
4. Buy labels and write on them the price of your cakes and cookies
5. Select two of the following ‘bulge-bracket’ investment bankers to ‘bookrun’ your initial offering of shares: Goldman Sachs, Morgan Stanley, Credit Suisse, Deutsche Bank, Merrill Lynch, Lehman Brothers, UBS, Citigroup, and JP Morgan
6. Select two to three ’boutique’ investment bankers to ‘co-lead’ your initial offering of shares such as Pacific Crest, Jeffries, Piper Jaffray, William Blair, Cowan, Needham (there are dozens and dozens)
7. These four or five banks form your ‘underwriting syndicate’ (the people who help you ‘make a market’ for the percentage of your company that you are selling to the public by taking initial orders from institutional investors).
8. Meet with your bankers to write your ‘Form S-1‘ which is a couple hundred page document detailing every part of your business, every product, every management team member, every metric, every material agreement, every options plan, every differentiation, every risk etc.
9. Determine which exchange you wish to list on. The NYSE has higher revenue requirements than the NASDAQ. The NASDAQ is weighted toward technology companies. NYSE ARCA and NYSE Euronext are also options for smaller offerings, as is the AMEX. The London Stock Exchange (AIM) is also sometimes an option, though it requires different filing steps and doesn’t presently provide the branding imprimatur or liquidity that a New York exchange does.
10. Presuming you are going public on an American exchange, file your S-1 with the Securities and Exchange Commission.
11. Publicly announce your registration and your intent to go public.
12. Respond back to the comments and questions that the SEC provides until they tell you you are good to go.
13. Determine with your bankers which metrics and the definition of each metric you will report to ‘the Street’ (the institutional investors that will buy/sell your shares and analysts which will cover your company once it’s public). You will have to report all financials (bookings, revenue, GM, COGS, Cap Ex, R&D, Sales & Marketing, General & Admin, OpEx, Net Profit, EBITDA, assets, liabilities, ARs, APs) and numbers such as customers, growth rate, ARPU, retention/churn, LTV, and CAC.
14. Work with your bankers to craft your story and prepare your slidedeck for the roadshow, emphasizing your strengths, metrics, and opportunity.
15. If the market timing is good then prepare for your roadshow. The market is rather bad right now (August 2008) for IPOs. There have been no venture-backed IPOs to date in 2008, although there will likely be a few in Q4 and many in 2009.
16. Determine your initial price per share target and how much money you wish to raise, and the percentage of the company you wish to sell to the public market.
17. Hold an ‘IPO roadshow’ in which you and your CFO visit the major U.S. cities to present to the institutional investors and mutual fund managers who may wish to purchase your shares.
18. At this point your ‘bookrunners’ will take orders for shares and help build interest among firms that they know have demand for businesses like yours.
19. Based on demand (# of orders) you and your investment bankers make a final determination on price per share, amount of shares to sell, and who to sell shares to (ideally stable investors that won’t trade out of your stock right away) the night before or the morning of the listing.
20. Ring the bell the morning of your offering and celebrate. Watch the wire of funds go into your corporate bank account. Now the work begins to properly manage expectations, overperform, and gain trust with your investors.

The Advantages to Being Public

The advantages to going public are generally greater access to capital to help grow the business, liquidity for pre-IPO shareholders (though not for at least 6 months after the offering), an ability to command a higher revenue multiple than most private companies can, and a greater level of trust and respect among larger customers or vendors.

The Disadvantages of Being Public

The disadvantages of being a publicly traded company include the 3 months of time you as CEO will have to be fully focused on going public and the 6 months your CFO will have to be fully focused on the process of going public–causing you to lose some focus on operations, having to report many of your key metrics and strategies to the public–including your competitors, having to ‘manage to the Street’ or in other words manage your results and report every quarter which sometimes causes short-term thinking, an inability to be fully flexible, the legal reporting requirements of Sarbanes-Oxley that cost around $2 million per year in compliance costs, and a requirement to be profitable or within clear visibility of profitability that sometimes can limit ability to pursue growth.

Some Tips for the Public Company CEO To Be

Here’s a few tips I’ve picked up here at the conference on being a public company CEO.

1. Manage Expectations Well: Become very good at managing expectations. As a public company CEO your job is to consistently hit or outperform your revenues and earnings per share (EPS) guidance every quarter. It takes time to develop trust with institutional investors. And if you go out saying one thing and end up not hitting that plan and doing another, it will cause turnover among your shareholder base, which will cause your share price to go down (bad). To become very good at managing expectations, make sure you have a solid financial model in place that can very accurately model future revenues, bookings, gross margins, and earnings projections. Don’t go out indicating you’ll have 10% net profits and then decide that you’re going to have 3% net profits so you can grow faster.
2. Build Relationships Before You Need Them: Just as with raising venture capital, build the relationships before you need them. Start going to the analyst and investment banker conferences at least 18 months prior to your offering and build relationships with both the ibankers and public investors. Make sure they know who you are and like you and the company story many months prior to the roadshow.
3. Pick Sticky Investors: When you are going out, you’ll decide which institutional investors get to purchase your stock and which do not. Ask in your contract with your investment bank that you significant input if not have final say as CEO. Get to know in advance which firms are long-term investors and which are not. You can use a service like the ‘Business Intelligence’ offering from Thompson Reuters to determine which institutions are looking at your deck and materials. Pick the firms that are going to hold your stock and not have high share turnover. Be wary of hedge funds who have high portfolio turnover.

Hope you enjoyed the post! I’ve still got a lot to learn so please let me know in the comments what I’ve mis-stated or altogether missed. Man I love this stuff.

The Opportunity of Our Lifetimes

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Our generation–those born in the 70s, 80s, and 90s–has a great opportunity ahead of ourselves. We have the ability for the first time in human history to eliminate extreme poverty within our lifetimes and ensure shared access to prosperity regardless of color, geography, or nationality. This possibility is worthy of a boisterous cheer.

By 2050, we’re projected to have 9.5B humans on this planet, however. Our planet will not allow a world of 9.5 billion humans living in the manner the average citizen of the Western world lives today, yet alone the 6.6 billion we have today.

Here inlies the great connection between sustainability and poverty. Unless we as a global society invest to develop the needed technologies to allow for humans to become sustainable in food, energy, and water production we will end up having less resources than are necessary for 9.5 billion people to live in a world without extreme poverty–let alone a world in which there is true shared prosperity, mutual security, and equality of opportunity. This is the greatest challenge of our lifetime as entrepreneurs, social entrepreneurs, scientists, technologists, and public servants. We must have sustainability to end poverty.

As a friend of mine from high school recent wrote me, “We must work toward the creation of a world where the standard of living, human rights, basic freedoms, and sustainability are all compatible.”

The two billion people that Goldman Sachs projects will be added to the global middle class by 2030 may never make it if sufficient food, energy, and water resources don’t exist. Dominic Wilson and Raluca Dragusanu, showed in a Goldman Sachs Economic Research paper published on July 8 called “The Expanding Middle: The Exploding World Middle Class and Falling Global Inequality” that close to 70 million people a year are entering the global middle class. They define this range as those with per capital income $6,000 and $30,000, purchasing power parity adjusted. They foresee shifts such as:

1. Changing spending patterns.
2. Increased pressure and competition for resources
3. Greater threat of environmental degradation
4. Rising environmental consciousness
5. Political and social changes

Through one lens, we could have resource wars, strife, famine, and terrible droughts, melting ice caps, biodiversity extinctions, and rising sea levels.

Through the other lens, we could have a world of growing prosperity, security through commerce, and gained respect among cultures and religion, a world of ubiquitous broadband, a world of communications technology that will enable humans to gain a common language and understanding, a world in which dictators can no longer use scare propaganda to wedge the false division of us vs. them, a world in which there is access to education, healthcare, nutrition, and opportunity for all, a world in which entrepreneurship thrives and technology drives improves food production, water access, and non-carbon based energies, a world in which our identity as human is so much more important than what divides us.

We have come to a turning point in history. This is both the challenge of our lifetime, and the great opportunity of our lifetime. How can we enable the great economic and creative potential for all humans while ensuring we leave a world of environmental stability to our grandchildren?

Will we invest in the creation of a new Apollo Plan for Energy? We will create the Global Bill of Rights that provides access to education, healthcare, and nutrition? Or will we fall into a once great society as the benefit of inexpensive petroleum leaves? Will Malthus finally get his way?

Is growing economic prosperity possible in a world of declining resources and increased commodity prices? Does our lifetime end up being marked in history as the time of resource wars, increased poverty, and environmental damage? Or does it end up being marked by global collaboration, shared prosperity, and sustainability. We have a choice.

This is the greatest opportunity of our lifetime, and our greatest challenge.

The Superficial Luxurious Degeneration of America

I’m in Las Vegas for the second time about to get on the plane home. I was here for a web marketing conference called PubCon. I’ve enjoyed my time here. I saw the Blue Man Group and the Wayne Brady Show. I also did the all-American thing and lost $100 at the blackjack tables after a poorly executed Martingale strategy on the $5 tables at the Sahara. I leave, however, feeling the same way I felt last time–a bit dirty, a bit uncomfortable.

I’m disappointed with the excess and waste of the Westernized luxury culture. Wealthy men with fake-as-can-be paid escorts on each arm at the $5000 per hand blackjack tables, faux-venetian canal boats, Rolex, Prada, Burberry, and Louis Vuitton stores galore, Ferrari and Maybach dealerships, swinger clubs with $65 entrance fees, men on the streets passing out cards with naked women available for between $35 and $150.

I wonder to myself–Does this city in many ways represent a key part of what is wrong with our culture or a key part of the freedom that causes it to thrive? I am as pro-competitive market economy as the next guy, but I have to wonder what role do super-luxury goods play in a just society. I’m not talking about the $200 purses or $40,000 cars–the splurges that perhaps are bad within the realm of defensible-reason in moderation for quality or happiness-inducing reasons. I’m talking about the $10,000 purses and $500,000 cars.

I was taught in my economics education that societies should work to maximize utility. But whose utility does it maximize to spend $75,000 on a diamond necklace in which the original diamond miners in the DRC were paid $10 to mine the raw materials for? The purchasers? What benefit could the male purchaser of a diamond necklace of this cost gain other than the ephemeral loyalty of an ever-expecting superficial person? It is not my place to judge or question their morality, but I must wonder.

Are there not so so so many better things to invest money into other than temporarily attractive fake parasitic members of the opposite gender? And trust me, I’m not talking about women in general, just a very specific type of women that happen to be all over Las Vegas and Beverly Hills. And some wealthy women are just as guilty as the wealthy men. If the advertising and celebrity indoctrinated culture of spend-and-trash materialism didn’t create false desires to ‘be better’ and ‘have more’ could we perhaps focus our investments on something that actually matters to our society?

Could we focus our efforts and funds instead on education, healthcare, and nourishment for the 26 million children who die every day on our highly-optimized six-sigma logistically perfected world from preventable disease and starvation? I’m not talking about giving questionable ideology-inspired bilateral or multilateral aid to dictatorial governments that don’t represent their populace. I’m talking about giving directly to proven projects in our community, country, and world run by local entrepreneurs through groups like GlobalGiving, Kiva, UNICEF, UNESCO, Doctors Without Borders, Heffer International, and Save the Children. Could awareness of the dire situation of so many of our fellow sisters and brothers reduce the demand to waste money on super-expensive non-necessary junk?

But then I came back to questioning myself. What right do I have to question the utility-maximizing choices of ultra-rich people? If they want to spend 1% of their income on a $500,000 car, shouldn’t they be able to? Isn’t the freedom to do just that an ingrained part of our American culture? Is it fascist to even suggest that we should create a society in which it would not be legal to buy a $500,000 car?

I have to agree–we should not make it illegal to buy a $500,000 car or a $10,000 purse. That wouldn’t jibe with the values of our liberty-based democratic republic and market economy regardless of how wrong or wasteful it may be. Our country was also built on the value of equality of opportunity, however. And equality of opportunity surely does not exist quite yet in America.

So perhaps instead of regulating the supply side of the equation we should work on reducing the demand side of the equation. If we can create a consciousness of the realities in our world today–and create a shared awareness of what is actually important (family, friends, health, laughter, memories, the ability to create, a sense of shared humanity, an end to genocide and warfare, environmental sustainability, an end to extreme poverty and hunger, and the prevention of preventable diseases), we may be able to create a world in which the super-luxury wastefulness of the Westernized Vegases, Macaus, and Dubais can legally exist, but end up being destinations that focus on entertainment rather than superficial luxurious waste. Is possible to have entertainment without super-luxurious waste? I think so. Is it unrealistic to attempt to reduce the demand side if we agree we should not regulate the supply side? Can a committed society actually build national human consciousness over a period of decades? I am not sure.

I sometimes wonder, is celebrity culture actually more interesting than the natural drama of the future of the world? I see lots of Entertainment Tonight shows but very few United Nations Tonight shows. Maybe the issue is how the news is presented. Perhaps we need to popularize and dramatize the storylines of the world’s future. Perhaps we need a new form of realtainment that combines The National Enquirer with The Economist. ‘Pakistani Inflation Worry’ turns into ‘Smack-Down Out East: Will Musharref Bodyslam His Central Banker?’ The Current Channel on cable has done a good job at this–but it just doesn’t reach enough people.

With all due respect to Nickelback, at the end of the day who really wants to be drugged up rockstars living in hilltop houses and driving fifteen cars with girls coming easy and the drugs coming cheap? I don’t want a brand new house on an episode of Cribs nor a bathroom I can play baseball in with a king size tub big enough for ten plus me. I think, and I may be wrong here, that the large majority of people want to be happy with friends and family around them and the knowledge that they’ve made a difference in our world.

The government, businesses, and the media tells us to ‘be American’ and buy, buy, buy. The goods end up quickly in landfills. Until the full cost of producing products is internalized instead of externalized in the Generally Accepted Accounting Principles we will be incented by misaligned priorities. Hurricane Katrina was a terrible disaster that had an immense human and environmental effect–and yet it increased our GDP due to the cost of rebuilding. That wasn’t economic growth–that was economic recovery.  We’re adding revenue to our asset column without first subtracting the associated expenses from the liabilities. We’re off-balance sheet financing our future.

As a final thought, perhaps we shouldn’t focus on Gross Domestic Product (GDP) but rather Net Domestic Product (NDP), the GDP minus the costs to replace the non-renewable environmental resources that are used up in producing the input goods and final goods. If we invested in companies on the NASDAQ and NYSE based on their EAARC (earnings after all real costs) instead of their EBITDA we would be a lot closer to having a market that valued companies appropriately based on their contribution to their customers and society.

I’ll end this essay with a quote from the comedian George Carlin. While I enjoy living in the fast paced globalized technology-driven business world as much as anyone—I agree with his core message…

The paradox of our time in history is that we have taller buildings but shorter tempers, wider freeways but narrower viewpoints. We spend more, but have less, we buy more, but enjoy less. We have bigger houses and smaller families, more conveniences, but less time. We have more degrees but less sense, more knowledge, but less judgment, more experts, yet more problems, more medicine, but less wellness. We drink too much, smoke too much, spend too recklessly, laugh too little, drive too fast, get too angry, stay up too late, get up too tired, read too little, watch TV too much, and pray too seldom. We have multiplied our possessions, but reduced our values.

We talk too much, love too seldom, and hate too often. We’ve learned how to make a living, but not a life. We’ve added years to life not life to years. We’ve been all the way to the moon and back, but have trouble crossing the street to meet a new neighbor. We conquered outer space but not inner space. We’ve done larger things, but not better things. We’ve cleaned up the air, but polluted the soul. We’ve conquered the atom, but not our prejudice. We write more, but learn less. We plan more, but accomplish less. We’ve learned to rush, but not to wait. We build more computers to hold more information, to produce more copies than ever, but we communicate less and less.

These are the times of fast foods and slow digestion, big men and small character, steep profits and shallow relationships. These are the days of two incomes but more divorce, fancier houses, but broken homes. These are days of quick trips, disposable diapers, throwaway morality, one night stands, overweight bodies, and pills that do everything from cheer, to quiet, to kill. It is a time when there is much in the showroom window and nothing in the stockroom. Give time to love, give time to speak! And give time to share the precious thoughts in your mind.

The Superficial Luxurious Degeneration of America?

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I’m in Las Vegas for the second time about to get on the plane home. I was here for a web marketing conference called PubCon. I’ve enjoyed my time here. I saw the Blue Man Group and the Wayne Brady Show. I also did the all-American thing and lost $100 at the blackjack tables after a poorly executed Martingale strategy on the $5 tables at the Sahara. I leave, however, feeling the same way I felt last time–a bit dirty, a bit uncomfortable.

I’m disappointed with the excess and waste of the Westernized luxury culture. Wealthy men with fake-as-can-be paid escorts on each arm at the $5000 per hand blackjack tables, faux-venetian canal boats, Rolex, Prada, Burberry, and Louis Vuitton stores galore, Ferrari and Maybach dealerships, swinger clubs with $65 entrance fees, men on the streets passing out cards with naked women available for between $35 and $150.

I wonder to myself–Does this city in many ways represent a key part of what is wrong with our culture or a key part of the freedom that causes it to thrive? I am as pro-competitive market economy as the next guy, but I have to wonder what role do super-luxury goods play in a just society. I’m not talking about the $200 purses or $40,000 cars–the splurges that perhaps are bad within the realm of defensible-reason in moderation for quality or happiness-inducing reasons. I’m talking about the $10,000 purses and $500,000 cars.

I was taught in my economics education that societies should work to maximize utility. But whose utility does it maximize to spend $75,000 on a diamond necklace in which the original diamond miners in the DRC were paid $10 to mine the raw materials for? The purchasers? What benefit could the male purchaser of a diamond necklace of this cost gain other than the ephemeral loyalty of an ever-expecting superficial person? It is not my place to judge or question their morality, but I must wonder.

Are there not so so so many better things to invest money into other than temporarily attractive fake parasitic members of the opposite gender? And trust me, I’m not talking about women in general, just a very specific type of women that happen to be all over Las Vegas and Beverly Hills. And some wealthy women are just as guilty as the wealthy men. If the advertising and celebrity indoctrinated culture of spend-and-trash materialism didn’t create false desires to ‘be better’ and ‘have more’ could we perhaps focus our investments on something that actually matters to our society?

Could we focus our efforts and funds instead on education, healthcare, and nourishment for the 26 million children who die every day on our highly-optimized six-sigma logistically perfected world from preventable disease and starvation? I’m not talking about giving questionable ideology-inspired bilateral or multilateral aid to dictatorial governments that don’t represent their populace. I’m talking about giving directly to proven projects in our community, country, and world run by local entrepreneurs through groups like GlobalGiving, Kiva, UNICEF, UNESCO, Doctors Without Borders, Heffer International, and Save the Children. Could awareness of the dire situation of so many of our fellow sisters and brothers reduce the demand to waste money on super-expensive non-necessary junk?

But then I came back to questioning myself. What right do I have to question the utility-maximizing choices of ultra-rich people? If they want to spend 1% of their income on a $500,000 car, shouldn’t they be able to? Isn’t the freedom to do just that an ingrained part of our American culture? Is it fascist to even suggest that we should create a society in which it would not be legal to buy a $500,000 car?

I have to agree–we should not make it illegal to buy a $500,000 car or a $10,000 purse. That wouldn’t jibe with the values of our liberty-based democratic republic and market economy regardless of how wrong or wasteful it may be. Our country was also built on the value of equality of opportunity, however. And equality of opportunity surely does not exist quite yet in America.

So perhaps instead of regulating the supply side of the equation we should work on reducing the demand side of the equation. If we can create a consciousness of the realities in our world today–and create a shared awareness of what is actually important (family, friends, health, laughter, memories, the ability to create, a sense of shared humanity, an end to genocide and warfare, environmental sustainability, an end to extreme poverty and hunger, and the prevention of preventable diseases), we may be able to create a world in which the super-luxury wastefulness of the Westernized Vegases, Macaus, and Dubais can legally exist, but end up being destinations that focus on entertainment rather than superficial luxurious waste. Is possible to have entertainment without super-luxurious waste? I think so. Is it unrealistic to attempt to reduce the demand side if we agree we should not regulate the supply side? Can a committed society actually build national human consciousness over a period of decades? I am not sure.

I sometimes wonder, is celebrity culture actually more interesting than the natural drama of the future of the world? I see lots of Entertainment Tonight shows but very few United Nations Tonight shows. Maybe the issue is how the news is presented. Perhaps we need to popularize and dramatize the storylines of the world’s future. Perhaps we need a new form of realtainment that combines The National Enquirer with The Economist. ‘Pakistani Inflation Worry’ turns into ‘Smack-Down Out East: Will Musharref Bodyslam His Central Banker?’ The Current Channel on cable has done a good job at this–but it just doesn’t reach enough people.

With all due respect to Nickelback, at the end of the day who really wants to be drugged up rockstars living in hilltop houses and driving fifteen cars with girls coming easy and the drugs coming cheap? I don’t want a brand new house on an episode of Cribs nor a bathroom I can play baseball in with a king size tub big enough for ten plus me. I think, and I may be wrong here, that the large majority of people want to be happy with friends and family around them and the knowledge that they’ve made a difference in our world.

The government, businesses, and the media tells us to ‘be American’ and buy, buy, buy. The goods end up quickly in landfills. Until the full cost of producing products is internalized instead of externalized in the Generally Accepted Accounting Principles we will be incented by misaligned priorities. Hurricane Katrina was a terrible disaster that had an immense human and environmental effect–and yet it increased our GDP due to the cost of rebuilding. That wasn’t economic growth–that was economic recovery. We’re adding revenue to our asset column without first subtracting the associated expenses from the liabilities. We’re off-balance sheet financing our future.

As a final thought, perhaps we shouldn’t focus on Gross Domestic Product (GDP) but rather Net Domestic Product (NDP), the GDP minus the costs to replace the non-renewable environmental resources that are used up in producing the input goods and final goods. If we invested in companies on the NASDAQ and NYSE based on their EAARC (earnings after all real costs) instead of their EBITDA we would be a lot closer to having a market that valued companies appropriately based on their contribution to their customers and society.

I’ll end this essay with a quote from the comedian George Carlin. While I enjoy living in the fast paced globalized technology-driven business world as much as anyone—I agree with his core message…

The paradox of our time in history is that we have taller buildings but shorter tempers, wider freeways but narrower viewpoints. We spend more, but have less, we buy more, but enjoy less. We have bigger houses and smaller families, more conveniences, but less time. We have more degrees but less sense, more knowledge, but less judgment, more experts, yet more problems, more medicine, but less wellness. We drink too much, smoke too much, spend too recklessly, laugh too little, drive too fast, get too angry, stay up too late, get up too tired, read too little, watch TV too much, and pray too seldom. We have multiplied our possessions, but reduced our values.

We talk too much, love too seldom, and hate too often. We’ve learned how to make a living, but not a life. We’ve added years to life not life to years. We’ve been all the way to the moon and back, but have trouble crossing the street to meet a new neighbor. We conquered outer space but not inner space. We’ve done larger things, but not better things. We’ve cleaned up the air, but polluted the soul. We’ve conquered the atom, but not our prejudice. We write more, but learn less. We plan more, but accomplish less. We’ve learned to rush, but not to wait. We build more computers to hold more information, to produce more copies than ever, but we communicate less and less.

These are the times of fast foods and slow digestion, big men and small character, steep profits and shallow relationships. These are the days of two incomes but more divorce, fancier houses, but broken homes. These are days of quick trips, disposable diapers, throwaway morality, one night stands, overweight bodies, and pills that do everything from cheer, to quiet, to kill. It is a time when there is much in the showroom window and nothing in the stockroom. Give time to love, give time to speak! And give time to share the precious thoughts in your mind.

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