Applying the lessons learned
The experiences of companies that went public during the 2020-2021 surge in IPOs – including their experiences in the 18-month slump that followed the IPO boom – can provide some valuable insights. The lessons to be learned are many and varied, but seven points can be particularly helpful to companies that are contemplating their own public offering in the near future.
1. Start preparing early. Taking a company public is a complex and demanding process, with the U.S. Securities and Exchange Commission (SEC) and other regulators demanding extensive amounts of highly detailed information that must be included in registration statements and subsequent filings. Among the requirements are historical financial statements prepared in conformity with U.S. GAAP applicable to public business entities and SEC requirements that have been audited in compliance with Public Company Accounting Oversight Board (PCAOB) standards. Companies previously might have been audited using American Institute of Certified Public Accountants (AICPA) standards, and arranging for additional audits under different, more stringent standards can be very time-consuming. Additionally, companies must understand and incorporate SEC-compliant financial statement accounting, presentation, and disclosure requirements that often are different from what the company currently prepares.
The sudden drop in IPO activity at the beginning of 2022 took even seasoned analysts by surprise. Companies that underestimated time needed and were unable to meet all requirements by late 2021 might have missed their ideal market timing, even if they delayed their offerings by only a few weeks.
The lesson for today’s companies is clear: Start preparing early so you can move quickly once market conditions are right. The window of opportunity can close quickly, as it did in early 2022.
2. Have the necessary infrastructure to avoid post-IPO problems. Just as companies take many steps to prepare for the IPO, they also must complete many steps to continue operating as a public company. So while the first hurdle is to get through the S-1 filing and meet all the IPO regulatory requirements, companies also need to look beyond the initial offering to make a successful transition.
Earnings releases, Form 10-Qs, and other public statements have strict deadlines, even for companies that qualify for emerging growth company status. Added to these, the SEC is considering proposed rules for various environmental, social, and governance (ESG) topics and has issued final cybersecurity disclosure rules – areas that are increasingly important to investors. The bottom line for companies considering an IPO is that the SEC has an extensive current rulemaking agenda focused on investor information needs, and any final rules might increase the volume of disclosures required.
Companies must have adequate technology infrastructure in place to consistently produce financial reporting quickly and accurately. They also need to have sufficient human expertise in place, including an internal audit function that understands SEC reporting requirements and compliance priorities.
The post-2021 slump offered many examples of companies that rushed to get in on the IPO boom before they were fully prepared to operate as public companies. Companies that needed extensions on filing deadlines – or worse, needed to restate results after a rushed, erroneous filing – quickly lost investor confidence. Failures in this area send a message to investors that the company does not possess the necessary management skills and discipline to be a successful public company.
3. Build a strong and qualified team. Financial reporting is only one area where expertise is needed. Companies also need access to specialized legal, finance, accounting, and valuation expertise, as well as experienced SEC counsel. Because private companies typically do not have all the needed expertise in house, they should line up third-party professional support teams.
Here again, it is important to get an early start. Drawing on an existing and proven relationship is much better than rushing to bring outside specialists up to speed at the last minute. In 2021, companies that did not have strong performers on board early often found themselves struggling to assemble such teams quickly, as the high demand for proven talent led to a shortage of qualified specialists.
4. Establish strong CFO leadership. Companies going public need a balanced combination of both finance and accounting expertise in both the pre- and post-IPO phases.
CFOs need to know everything about their numbers for investors. They need to have a clearly articulated financial strategy and detailed forecasts. In addition, if plans are not met, they need the ability to clearly communicate to investors why that happened as well as mitigation strategies.
Those companies that were successful in raising capital during the 2020-2021 IPO boom generally were those that had strong, finance-oriented CFOs in place. These leaders were clearly in tune with the companies’ valuations and capital needs.
In addition to finance expertise, however, newly public companies also need strong accounting leadership. A chief accounting officer or controller with experience in SEC reporting will be a key leader during the critical period immediately following the IPO.
5. Align stakeholders’ expectations. It’s important that all the major participants in an IPO have realistic expectations. Existing shareholders and executives must recognize the new requirements they will face as a public company and realize they likely will need to make some major changes in order to adapt.
But the newly incoming board members and officers must enter the relationship with eyes wide open as well. Board members with backgrounds in large public companies bring valuable experience and understanding to the business. At the same time, however, they must understand the inherent differences in a newly formed, smaller enterprise, and they often will need to adjust their expectations to reflect their new circumstances.
In the months following the 2020-2021 IPO boom, numerous new board members and officers with large public company experience found themselves frustrated with their new companies’ relative lack of resources and limited capacity to meet financial reporting requirements. New board members and officers should be sure they recognize this and adopt appropriate governance practices.
6. Know the market. When going public, timing is critical. As noted earlier, the sudden drop in IPO activity at the end of 2021 demonstrated how quickly market sentiment can shift, which is why companies need to be able to recognize trends and anticipate market inclinations in advance.
Identifying the right time for an IPO is too important to simply leave it to chance or to rely on instinct. Access to market expertise, either in house or from external sources, is essential. While companies typically have relied on their investment bankers or other underwriters for market advice, many of these experts were also caught by surprise by the sudden 2022 downturn. At a minimum, companies anticipating an IPO should consult with multiple trusted advisers for insights into market conditions and outlooks.
7. Verify an IPO is really the right strategy. Possibly the most fundamental lesson companies can learn from the most recent IPO boom is to be sure an IPO is actually a good idea in the first place. As important as timing is, management should not take a company public just because the market seems right. management also should be confident in the company’s long-term growth projections, investment thesis, and path to profitability. Equally important, it should be confident these will stand up to scrutiny in the public markets.
Before committing extensive time and resources to IPO preparation – and certainly before making any public moves in that direction – senior management should verify that an IPO is the best way to achieve their objectives. For example, if the goal is to provide early investors with a way to exit, recoup their investment, and lock in gains, going public might be the right step. But other strategies might offer a better return, and savvy investors will want to consider all alternatives before committing.
Similarly, if the objective of the IPO is to build up the company’s capital base or to provide funding for new opportunities or the next phase of growth, management should ask if going public now is the best way to achieve those financial goals. A prudent management team will seek advice from a variety of trusted sources as it explores alternatives.
No one can predict with 100% confidence that the potential 2024 IPO resurgence will actually come to pass. Despite the uncertainty – or perhaps because of it – companies currently considering an IPO should remember the lessons from the 2020-2021 boom, recognize what’s going to be different this time, and understand how those differences could affect their plans.
