Make sure your board is qualified, and show investors significant growth
Filing for an initial public offering for a company can be an alluring prospect, but is it the right path to take?
It was for Apptio in late September. That’s when the Bellevue-based company debuted 6 million shares of Class A stock valued at $16 per share, but CEO Sunny Gupta and crew had started the IPO journey several years prior.
In other words, it’s best to test the waters before jumping in and fortify your company with a strong infrastructure, strategic staffing, and board members who are experienced in the nuances of IPOs.
Jeana Kim and Michael Nordtvedt, both partners at Wilson Sonsini Goodrich & Rosati in Seattle, worked on the Apptio deal and agree that bolstering staffing in the accounting and legal departments is crucial to going public.
“The legal department works with compliance,” Nordtvedt said. “The accounting folks are responsible for reporting historical financial statements. A huge premium is put there. You need to be accurate to financial reporting. The (U.S. Securities and Exchange Commission) sets high standards.”
Kim says that if a company is considering filing for an IPO, it’s important to evaluate its board.
“The board will have many more responsibilities as a public company,” Kim said. “It might be a good time to change who is on the board and make sure they have the qualifications.”
Kim said the SEC establishes certain requirements once a company goes public.
“Make sure (the board members) have those capabilities,” she said. “Add other board members that have expertise to supplement existing board members.”
Kim said a company’s board has a responsibility to provide direction to, and oversight of, management on behalf of stockholders. Board members also are responsible for reviewing the company’s quarterly and annual reports and proxy statement prior to filing them with the SEC, and other oversight in regards to a company’s financials. Nordtvedt and Kim advise companies to establish a board at least six months before filing.
Nordtvedt said a good time for a company to go public is when there is relatively low market volatility.
“There was very severe volatility in the first quarter, and there were no IPOs in the first quarter,” Nordtvedt said. “During the summer, there was great stability, which was ideal for companies to get out.”
The constructive market conditions, then, made it ideal for Seattle-based tech company Impinj to go public in July and Apptio to follow in September.
Nordtvedt said it’s not mandatory for tech companies like Apptio to show profitability, especially during strong market conditions. What is important is to show investors significant growth. In September, Apptio, for example, showed revenues topping $100 million over the past two years, but it had yet to turn a profit.
But during severe volatility, it is important for a company to develop a value proposition to investors.
“In connection with its IPO, a company will assemble a team of experts — investment bankers, lawyers, investor relations professionals, accountants and others — who know the industry, investors, and markets and can help to refine the story that the company has already developed to maximize its impact, while at the same time ensuring that investors have all the information they need to make an informed decision about whether to buy stock,” Nordtvedt said.
Kim says that if a company is in the process of changing its business model, it’s best to carry that through before going public.
“When a company pivots its business model, a ramp-up is typically required to gain market share in the new line of business and generate the revenue growth that is required for a successful public company,” Kim said. “In addition, such changes typically require significant investment of capital before a meaningful return, and public investors are not willing to take the risk of investing in an unproven business model.”
Finally, 2016 was a presidential election year. Some companies might have decided to hold off going public until knowing our next president. “The two candidates (had) two different approaches to policy issues that can impact a person’s business,” Nordtvedt said. “For investors, it can be difficult to assess all those variables.”
When a company files for an IPO, figuring the price of shares is important. Nordtvedt said a company should look at other companies with similar profiles when considering price.
“Look at expected cash flows over some period of time,” he said. “For most technology companies, they’re doing a comparative company analysis.”
Nordtvedt and Kim said three things should be clear before filing for an IPO: mature processes and procedures, an understanding of results, and good visibility in how the business is growing.
“If you don’t have (all) of those things, then you’re not ready to take that step,” Nordtvedt said.
This article originally appeared in the December 2016 issue of “425 Business.”