Accelerator Strategies Inc. 
Pre IPO Lessons

Pre-IPO Lessons to Avoid Perils

  As the public listing goal appears closer on the horizon, a myriad of new external advisors competes for C-suite ears—from investment bankers, media relations experts to investor relations professionals and accountants/lawyers.  They often tout new strategies, revised business plans and even suggestions to add management bench strength – all in the name of perceived public market expectations.  Before long, once disciplined CEOs find themselves changing course, often several times, in search of the IPO destination.  Resist these temptations!  Read on... 

  Anticipating the IPO journey, here are some issues to consider:

1.   Embrace Public Company Governance While Still Private
Manage a private enterprise to public company governance standards.  It isn’t just good business but, as an eventual public company, governance is non-negotiable.  Attract independent Directors who may tell founders not what they want to hear but what they may need to consider.  Ensure that current Directors don’t have any personal skeletons that get in the way of public listing background checks/Director eligibility questionnaires – familiarize the Board with these requirements.

   Adopt & Report on Key Business Benchmarks

   CEOs manage their teams and the business using operating and financial benchmarks that they believe are relevant.  These may (hopefully won’t) differ from those later expected by equity analysts and institutional investors.  Look forward and see if your benchmarks need to be expanded to include key drivers later tracked for public peer groups.

  Jettison Baggage

   Related party transactions are rarely good business, and with a public listing they are not just reported on but viewed dimly. Common baggage can include founding shareholder contracts to provide non-management services (e.g., leasing property to the company at questionable rates, maintaining underperforming family members on payroll, etc.), unreasonable employment contracts and anti-dilution rights granted to early investors or VCs.

4.   Review Your Team
  Your team must not only perform post-IPO, it must withstand the scrutiny of many eyes assessing each team member’s background, integrity and ability to deliver.  Don’t let investment banks and prospective investors shine a light on the team’s chinks.

  The quality of the management team of an early stage enterprise literally defines the line demarcating survival or failure.  Recruiting the best talent to grow a start-up from zero to later stage, from no customers and cash burn to loyal clients and profitability – all this is part of a CEO’s alchemy.

5Profitability—Or No Cash Burn—Is Becoming a Key IPO Gate

   Generating positive cash flow (after maintenance capex) should be the number one business goal. Gone are the days when IT (software or hardware) and telecom enterprises with a good business plan, an innovative application/IP and a top management team but marginal revenues and an immature customer base shouldering high costs can count on accessing public markets. There are exceptions, namely Green Tech (battery technologies, alternate energy innovators, etc.) but they are few in these very constrained market conditions.

6.   Don’t Wait Until Time Runs Against You to Fortify Cash

  Like predicting the top of any stock, no one has the definitive insight to time an IPO. Windows open and can shut down suddenly. If your company is in one of the few hot sectors where going public before hitting positive cash flow is possible and you’re counting on an IPO to survive – don’t.  Even if it’s expensive, secure some equity or debt going into the IPO process to ensure that you have some leverage and are not caught out if the market suddenly downturns and denies a listing or substantially downsizes it.

7.   Be Skeptical of Transaction-Focused Advisors  

  Be aware of the difference between advisors focused on transactions and those who are committed to your company's long term success.   If you have hired an investment bank to be your agent to secure pre-IPO financing, you will need to give them an exclusive representation period in exchange for ‘best efforts’ to find funding on your behalf.  But as with any agent, there are no promises: if your company’s balance sheet is getting desperate for cash, you may find yourself in a corner.

One problem with pre-IPO agency deals is many investment banks will try to insist on rights to participate in follow-on financing with certain rankings in the future transaction.  This might be fine if you attracted a Tier 1 dealer, but such commitments will encumber subsequent shopping for IPO underwriters who may have a different view of your private equity agent’s role.  The commitments are preferably avoided; if made, they will need to be addressed later and concessions negotiated.