Mid-year Reflection:
Six Key Takeaways on the State of the IPO Market

We took a few minutes to reflect following a very busy IPO quarter and thought we'd share some of the trends we're seeing in the market.

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, 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 15–20% of companies planning for an IPO in the next few years to adopt a dual-class capitalization structure, rivaling or exceeding the levels we saw in 2012–2018.

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.

Related Contacts
Jon Avina Partner, Palo Alto
David Peinsipp Partner, San Francisco
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