Let’s face it – the IPO window opens and closes in a rather difficult-to-predict manner. 2021 was a banner year for IPOs while 2022 and 2023 were marginal at best. However, the IPO market has started to show signs of life as the Federal Reserve starts to reduce interest rates.
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, the upside from being prepared can be very rewarding, while the downside if you are not ready can be huge.
Let’s explore the lessons I have learned about IPO preparation through my own experiences so you can make your IPO and post-IPO experience the best that it can be.
In my first experience, I was VP of 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 a 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 huge check from HP and bringing it back to headquarters. That and other key OEM sales saved our bacon. Rather a one-time type of solution, not something that you can depend upon on an ongoing basis.
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 bring in the OEM contracts.
This episode at Ashton-Tate underscored two big mistakes, the second 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 who 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, (my team there developed the Norton AntiVirus) and GM of the Norton Product Group. Before we took Symantec public, our CEO had recruited a seasoned and conservative CFO. After the Symantec IPO, we exceeded our projections for profit and revenue growth for sixteen consecutive quarters 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. However strong operating results are not sufficient if they are delivered unpredictably.
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 with analysts, he was conservative and deliberate. Internally, we 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 which made our results much more predictable and enabled us to manage and meet expectations.
Re-forecasting every 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 only expand headcount by adding temporary employees when higher revenues had been delivered, allowing us to convert temp hires to full-time positions in subsequent budget cycles.
At least every 6 months, I would meet with the Director of Sales and review my business units’ (at the time the Peter Norton Product Group) revenue forecasts. In those discussions, we evaluated our 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.
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 the best advantage as you deliver a strong post-IPO performance.
Don’t forget that you can use Reg A+ to conduct your IPO or Direct Listing to the NASDAQ or NYSE. The Direct Listing method is relatively new and has the advantage that you can raise your capital online and then list on one of the major exchanges while you save money by not needing to pay Underwriter fees.
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Rod Turner
Rod Turner is the founder and CEO of Manhattan Street Capital, the #1 Growth Capital service for mature startups and mid-sized companies to raise capital using Regulation A+. Turner has played a key role in building successful companies including Symantec/Norton (SYMC), Ashton Tate, MicroPort, Knowledge Adventure, and more. He is an experienced investor who has built a Venture Capital business (Irvine Ventures) and has made angel and mezzanine investments in companies such as Bloom, Amyris (AMRS), Ask Jeeves, and eASIC.
www.ManhattanStreetCapital.com
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