Listening to our esteemed IPO seminar panelists – including executives and directors of some of the fastest growing companies representing some of the most successful IPOs of the last couple years, as well as industry experts and top advisors – we had a front-row seat* to make some observations on the general state of the IPO market today.
Here are a few:
Company culture is critical
Going public isn't really an end, but it is a new beginning. The transition to a new environment, with new rules and stakeholders, can be particularly difficult for disruptive technology and life sciences companies so deeply defined by their corporate individuality. The best companies use their IPO as a reason to evolve, adapt and mature, but they don't change who they are. Culture can and should transcend the private to public company jump. Listening to the CEOs, CFOs and general counsels that have led great companies through IPOs the last few years, a critical element that sticks out to us is a commitment to the DNA and culture of the company through whatever challenges they face. A strong culture is a tool to wield in a successful IPO, and credibility with The Street often mirrors credibility within your own team. Culture might be the single hardest widget to create in business, but once you have it, the supply can be endless.
Key metrics remain, well, key
Public investors are always looking for disclosure of the right operating metrics, beyond just the GAAP financial statements, which best help them understand how management views and runs the business and will be most indicative of periodic financial results to follow. Best practice is to view your key metrics through your management's eyes rather than an industry or peer group lens. It's also critical to be mindful that initial key metrics at IPO will be the same metrics reported to The Street for years to come, giving investors the best chance to measure the company's financial results over that time. The SEC continues to focus heavily on key metrics – and in particular non-GAAP financial metrics – to ensure that IPO companies are being clear and complete with investors about the most critical drivers of the business.
Investors want hyper growth AND a clear path to profitability
Profitability can be an inherently weird thing for many growth companies. It can feel like relenting and accepting what you built is enough. But many companies want to keep acquiring, expanding and refining, taking every ounce of revenue and dumping it back into the system to create a better version of itself to increase revenue and market share. However, growth has to be measured against an ultimate goal of profitability. A critical component for high-growth companies going public today is to outline for IPO investors in a clear and convincing way how that company can ultimately capitalize on its growth and market presence to make money for its investors.
The demise of dual class has been greatly exaggerated
Following a post-Google decade of increasing use of multi-class structures to ensure that visionary founders continued to hold control of their companies after IPO (culminating in the first-ever sale of no vote stock in Snap's IPO in 2017), the public investment world came down hard on dual class. Accordingly, we saw a lull in dual-class offerings and what might indicate the beginnings of a return to one-share-one-vote pervasiveness. But as we await a new crop of super-growth and high-profile companies to go public, it is clear that concerns over widely distributed public voting power and an unfamiliar culture of short-term financial results-driven fetishism worries founders who want to steer their companies, without interference, through the potentially rocky early years of being a reporting company. Based on our estimates, we expect dual-class companies to account for 15–20% of the IPOs for the next few years, rivaling or exceeding the levels we saw in 2012–2016.
Board composition and good corporate governance
A critical component to going public is to develop a culture of compliance and to create a governance (including board and committee) structure at the very top that will further those compliance goals. That means finding the right, diverse perspectives, outlooks and skillsets (from an audit committee "financial expert" to industry experts to product or marketing gurus) that can help management get stronger and oversee the company's successful growth. Great directors are being sought by a lot of potential directors, so we advise to start early, do your diligence and have conversations with your existing directors and investors to determine what your post-IPO board should look like.
The SEC is watching (and wants to help)
The first part sounds creepier than it is. Despite the "government shutdown" that closed the SEC's doors just before the holidays in 2018 through early February of 2019, the SEC never took its eye off the ball, and there is evidence many staffers worked for no pay during the period to ensure a smooth reopening and as little impact on registrants and the market as possible. It has long been our advice that potential IPO issuers work closely with the staff at the SEC, leveraging their collective expertise and experience to help create better disclosure, refine public reporting countenance and enter the regulatory regime in the best position possible.
* Metaphorically, of course, since we mostly stood at the back of the room eating too many of whatever the bowls of almonds, peanuts and raisins are called now that no one is including the wheaty Chex Mix ingredient that for whatever reason was the most relevant part of the collective name. Look, what we ate while standing at the back of the room is not really the point here.