Few events during the life of a technology company are more celebrated than the initial public offering. Whether the goal is to access capital markets, increase visibility and prestige, attract and reward employees, or any number of other objectives, the IPO signals a coming of age for many.
Even amid the economic tumult of the last year and a half, technology companies continue to draw significant amounts of capital. While activity involving special purpose acquisition companies slowed earlier in 2021, the ripple effects of the SPAC boom of 2020 continue to affect the market. Given the pandemic and other continuing geopolitical tensions, uncertainty will likely remain a factor for companies considering their public debut, but for some businesses conditions may also signal the time is right..
The IPO window can open or close with little notice. While markets move quickly, the IPO process requires significant lead time, thus it is critical for companies that see an IPO in their future to make a thorough assessment of what steps need to be taken and then develop a plan to tackle key items.
To get started, here are five considerations that should be a part of your IPO planning process and are discussed more fully in RSM’s guide to going public:
1. Before you look forward, look back
Perhaps the best part of going public is seeing the company vision come to light. With the IPO proceeds in the bank, a talented and dedicated team can drive the company to its full potential. However, getting to this point means enduring the gauntlet of investment bankers’ due diligence, investor skepticism and regulatory scrutiny. Even the best-managed private companies can benefit from a thorough review of historical documents, agreements and practices. If there are no bona fide skeletons to be found—and hopefully there are not—there is always a collection of errors, omissions and plain old “what were we thinking?” items that will have to be corrected, renegotiated or explained. Unsigned or missing documents, unfavorable or obsolete agreements, unsupported stock option prices, missing share certificates and income tax nexus issues are among the endless list of potential issues. Almost all items can be dealt with, but only if you know about them. As you conduct this exercise, take action as if everything you do will be examined and questioned, because it will.
2. Build the team, both internal and external
Key roles (e.g., SEC reporting manager, director of investor relations) will need to be added to your team if—like most privately held companies—you do not already have them; however, don’t forget to also assess the skills and experience of the existing workforce through the public company lens. Many IPO-focused companies find they often need to elevate the capabilities of the accounting and finance team, add depth to the executive suite, and otherwise make an honest assessment of long-time employees who simply might not have the depth of experience for what lies ahead. For companies choosing a SPAC partner, it is important to evaluate that partner thoroughly as well.
This evaluation should look well beyond the IPO process itself to life as a public company with its greater regulatory responsibility and investor expectations. Just like the internal team, the external team of investment bankers, lawyers, auditors, valuation experts and other advisors should be assessed to ensure the company is working with the right team of advisors for both the IPO and the future. Public company experience is a critical prerequisite for all external advisors.
3. Establish a robust governance framework
The composition of many private company boards is heavily weighted toward investors, founders and company executives. To meet the listing requirements of any major stock exchange, a company has to recruit independent directors (including an audit committee chair that meets certain minimum requirements for financial acumen), form new committees, revise or adopt committee charters, conduct a more rigorous review of executive compensation, and otherwise prepare for more structured and formal proceedings. Recruiting new directors alone can take months of candidate screening and interviews. Significant turnover or expansion of a private company board as a part of the IPO process is not uncommon.
4. Fortify systems, processes and controls
Being a public company subjects the accounting and finance function to a faster tempo, greater scrutiny and increased accountability that places a premium on speed, efficiency and accuracy. For example, the company’s financial statements must be published quickly four times a year rather than just at year-end. In addition, management of public companies must evaluate the effectiveness of internal control over financial reporting, and management’s assessment of internal control over financial reporting must be included in the annual report. Many manual, homegrown processes are not sufficiently scalable to meet the demands of a growing technology business and financial statement users’ insatiable need for data.
Issues with the status quo apply not only to historical financial information, but to budgets and forecasts as well. The ability to see where the business is going and set reasonable and achievable expectations is critical. Few things are more damaging to a new public company than a missed revenue or earnings forecast right out of the gate. Quite simply, the typical private company systems, process and controls are generally inadequate to meet the demands of being a public company. These three elements should be evaluated and upgraded in tandem. Throwing a technology solution at bad processes does not improve capabilities or mitigate risk any more than simply adding people improves efficiency. Systems and processes should be built with scalability, efficiency and risk management in mind.
5. Assess how to tell your story
Beyond the nuts and bolts of managing the process, the IPO is where a company first decides how to tell its story to a broad audience and, in so doing, sets investor expectations for the kind of information and metrics it will make available in the future. While every company has its own story to tell, a story that is too complex or metrics that do not conform to industry norms are easily ignored by the market. The type of information you disclose and the manner in which you present it in the IPO prospectus is not etched in stone forever, but a detailed review of competitor filings and advice from the investment banking team should provide a solid blueprint for how to best get the company’s message to the market.