May 23, 2008
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:
- Build your company to at least $40M in annual sales (the sort-of-hard ‘takes 7 years’ part).
- Reach breakeven or profitability and have solid positive EBITDA in sight.
- Invite investment bankers to pitch you in what’s called a ‘bake-off’
- Buy labels and write on them the price of your cakes and cookies
- 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
- 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)
- 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).
- 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.
- 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.
- Presuming you are going public on an American exchange, file your S-1 with the Securities and Exchange Commission.
- Publicly announce your registration and your intent to go public.
- Respond back to the comments and questions that the SEC provides until they tell you you are good to go.
- 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.
- Work with your bankers to craft your story and prepare your slidedeck for the roadshow, emphasizing your strengths, metrics, and opportunity.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
October 23, 2007
The speech was titled Finding The Purpose of Your Life in Six Lessons. I had a blast giving the speech. I can’t say I’ve ever danced to Soulja Boy in front of 800 people.
The accompanying music for the slides is Yeah by Usher Feat. Lil Jon and Crank That Soulja Boy by Soulja Boy.
Here’s the BHAG gorilla…