With many of the Future Fifty companies and other digital companies around the UK preparing for an IPO, we heard from Jim McGeever, President & COO of Future Fifty partner, NetSuite, on the key steps in this journey
2015 was far from a banner year for IPOs. The volume of IPO proceeds hit its lowest number since 2009 in the US – falling 64% YoY (year on year), according to US based Renaissance Capital. European IPOs fared better, but proceeds were still down 11% YoY as of Q3, according to PricewaterhouseCoopers’ “IPO Watch” analysis.
This year’s lackluster results were driven by a combination of factors, including “uncertainties about the Federal Reserve and European monetary policies, concerns over the Chinese economy, poor IPO performance, declining energy prices and increases in M&A and private market transactions,” according to an annual report from Renaissance Capital, a US based advisory firm for IPOs.
But amidst this negative news, 2015 did have its share of success stories. In the UK, there were some notable successes – including email management and security company Mimecast, web security firm Sophos and payments firm Worldpay. Draper Esprit, a VC investment firm, and Purplebricks, a real estate agency are two other notable tech IPOs to watch out for according to TechWorld.
Those success stories reinforce that certain companies will continue to thrive despite the trends in the IPO market. For companies prepared for the rigours of “public life” the upsides are enormous – IPOs provide liquidity to investors and employees, and credibility in the market to either acquire other companies, or to be acquired.
A company that is well prepared for an IPO is that way because it has the people, processes and systems in place that have enabled it to operate like one for at least a year or more.
Make sure the right people are in place
Let’s take some lessons from what ensured success in markets like the ones we’re looking at today. The results from a survey of institutional investors by Ernst & Young conducted in 2009 – the last down year for the IPO market – reveal much about how companies prepping an IPO in 2016 should approach the process. It surveyed 305 institutional investors from around the world regarding how they evaluate new equity offerings.
Management credibility and experience ranked the most important non-financial IPO success factor to these investors. Numerous studies recommend that your company’s management team be in place for at least a year, and that the people on it have the experience to operate as a public company. In particular, that experience needs to lie within the finance organisation – which will, in US markets, be tasked with rigorous reporting requirements from Sarbanes-Oxley. Consider as well, that the demands of the IPO process itself – which can take anywhere between 90 and 120 days – will take the CFO away from day-to-day operations, and require a strong controller to continue business as usual. In fact, the entire management team of the company will need to be deft at balancing what’s required of the IPO and running the company.
Ensure financials support the vision
While the people behind the processes are crucial to success, financial operations themselves also need to be fine-tuned. Debt-to-equity ratio was the most important financial IPO success factor to investors in that Ernst & Young survey. Successful IPOs have enough of a market capitalisation to support viable trading, and have predictable revenue and earnings streams. Companies must deal with current accounting challenges – especially asset valuation impairment, consolidated subsidiary financial statement issues and revenue recognition, according to Ernst & Young.
Implement systems to support accurate reporting, business visibility
The reporting requirements of public companies are far beyond what manual processes and Excel spreadsheets can handle. In turn, US regulatory requirements prevent your company from changing financial software systems during the IPO process or for a year after it’s complete. Robust, scalable and integrated financial systems will ensure that information is accurate and can be provided in a timely manner, and that business forecasting provides visibility for guidance.
Establish rock-solid governance
Transparency and consistency in your business is of paramount importance to regulators and investors. Every person in that company – especially management – needs to understand how they relate to every one else. This is especially crucial when it comes to processes around risk management. According to Ernst & Young, “public companies must develop a disciplined, consistent approach to categorising and disclosing actual and potential risks, and develop trusted voices within management and ownership that will keep risks from clouding decision-making or derailing worthwhile ventures.”
Know your company’s story, and how to tell it
Make sure your business can articulate not only what it will do to make your product cheaper or more efficient, but what the next generation of that product will look like. Developing a strong brand identity and vision is key to success.
It’s not only important to have a good story – but to have a team in place that can tell it. A good investor relations and communications team – one that can not only respond rapidly to good and more importantly, bad news, but takes a proactive approach with investors to convey the brand story – pays dividends. Good investor relations can’t directly sell product or ensure partners, but they can help keep your company from making news for all the wrong reasons, and derailing a successful IPO journey before it even begins.