Let’s face it – the IPO window opens and closes in a rather difficult to predict manner. 2015 was a banner year for IPOs while 2016 was marginal at best. However, the markets have been picking up momentum recently – post-Brexit. After a dry spell for technology IPO’s, Apptio had an uptick of 40% in its IPO on September 23, 2016, and Snapchat has announced their planned IPO to raise $4Bill, underwritten by Morgan Stanley. If their offering is well received, that will rev up the market for a while.
There are a lot of companies in the IPO backlog that are waiting for the window to open, and it is difficult to know ahead of time when the IPO window will be open for you. So you may not get much notice when the market is open for your IPO, and I ask you – will you be ready? Can you say with confidence that you and your team are adequately prepared for the rigors of public reporting? Most companies are not. This type of prep takes some time to set up, and the payoff can be huge.
Let’s explore the lessons I have learned about IPO preparation so you can make your IPO and post-IPO experience the best that it can be.
In my first experience, I was VP Sales for Ashton-Tate, a Los Angeles-based and bootstrapped startup that made good. Within weeks of our IPO, a direct competitor launched a well-crafted and high-impact head-to-head ad campaign that played on the weaknesses of our product (I give them full credit for an incredibly effective campaign, they hit us hard!). The campaign had little effect on corporate sales, but dramatically and rapidly undermined our retail momentum.
Even though we had market leading share of 70%, resellers who would normally purchase multiple units of our product (dBASE II) instead shrank their order to just one unit, or none at all, and placed an order for the new competing product (called R:BASE) to check it out. This caused a dramatic drop in channel sales. As a result, it was virtually certain our first quarter of post-IPO results would be a disaster, with rapidly dropping revenues and profits, unless we solved the problem.
To make matters worse, at about the same time, our CEO had optimistically told financial analysts that Ashton-Tate’s revenues and profits would be higher than our internal plan for the quarters following the IPO. The CFO was very stressed, as was I, since I headed up the worldwide sales organization.
You can imagine the intensity of the pressure on the sales group. We pulled out all the stops and were able to negotiate contracts with enough of our largest OEM (computer manufacturer) customers to make up for the channel sales deficit. In one case, I recall a challenging negotiation with Hewlett-Packard that resulted in collecting a check for $1 million from HP and bringing it back to headquarters. Those sales saved our bacon.
So we were able to meet our revenue and profit numbers, and we did so legitimately. However, this was not an experience that I recommend you put yourself through! We were very fortunate that we were able to close the OEM contracts. In a similar situation, BOX was less fortunate and was mercilessly hammered by the stock market when they missed their numbers in their first quarter post-IPO.
This episode at Ashton-Tate underscored two big mistakes, at least one of which is typical of many newly public companies. The first was that our principal product was difficult to use (famously so). This problem should have been dealt with earlier, and left us vulnerable to competition. The second is that our CEO was too casual when he chose what to say to the financial analysts that were following our newly public company. Further complicating matters, our CFO did not have enough clout with our CEO to be sure that management spoke with one voice.
Six years later I was Executive VP of Symantec, and GM of the largest product group. Before we took Symantec public, our CEO had recruited a seasoned and conservative CFO. After the Symantec IPO, we delivered two years of consecutive quarterly profit and revenue growth, and in so doing, built a strong institutional investor following and a great reputation. Our stock price reflected the consistent delivery of improving results. So how did we achieve this?
Our products were delivering growth and market momentum–the first and primary ingredient in satisfying Wall Street. But strong operating results are not sufficient if they are delivered in the wrong way.
When it came to dealing with the financial analysts who followed SYMC, the first and most important step was that our CFO was given authority by our CEO to handle communications and set market expectations. When he communicated to analysts, he was conservative and deliberate. Internally, he established a culture, a forecasting system and a methodology across the business units of the company that placed a high priority on controlling and monitoring expenditures and revenues. We had the forecasting and delivery in place at all levels in the company that made it clear we had to manage and meet expectations.
Re-forecasting each six months allowed our budgeting system to reflect changes in the business, and our business unit managers were encouraged to spend according to conservative revenue forecasts. This meant that we kept our hiring under control and we would expand headcount by adding temporary employees until higher revenues had become established, allowing us to convert temp hires to full-time positions.
At least each 6 months, I would meet with the Director of Sales and review my business unit’s (at the time the Peter Norton Product Group) revenue forecasts. In those discussions, he evaluated his confidence in my teams’ numbers while balancing them against other product groups’ forecasts. A balanced conservative approach in this process resulted in revenue plans that were achievable and expense growth that was geared to actual revenue growth. This process led to more predictable business results, and to a dynamic expenditure approach that followed sales, rather than preceding sales.
We were able to face the stress of investor scrutiny with a level of calm and preparation that made us much better equipped to weather the inevitable storms – and just as importantly, the senior executive team had enough time to lead and grow our business as a direct result. (For your reading pleasure, here are some examples of recent IPO successes and failures to whet your appetite and highlight the rewards that come to the teams that plan carefully.)
In essence, Ashton-Tate went public without a thorough plan and in a somewhat vulnerable state, while Symantec executed its IPO with a clear system, communication processes and a culture of preparedness in place. What I learned from my first IPO journey allowed me to be much more emotionally prepared for my second. I was happy to take a conservative stance on revenues and expenditures because I had lived the downside scenario already.
In all, while there is nothing that can replace strong fundamentals in a company that is pre- or post-IPO , the strong practices and culture of preparedness that you develop ahead of time will serve your life and your company to best advantage as you reach for the golden ring of a strong post-IPO performance.