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On the road to IPO? 6 obstacles to avoid at all costs

All eyes are on you when your company goes IPO. Everyone, it seems, wants to know the company’s every move—its past results, its risks, its future projections. Working at a newly public company can make employees feel like they’re in a giant fish bowl with everyone swimming around and crashing into each other. Unless, that is, the company planned ahead for a bit of mayhem.

A new intelligence report written by RoseRyan CEO Kathy Ryan warns top executives of pre-IPO companies about six potential pitfalls that await them on the multi-year journey they’re about to undertake. These are obstacles along the IPO path that can easily sink a deal.

By being more aware of the potential problem areas, companies have a better chance at a better ride (it’ll be bumpy no matter what—as anyone who has suffered through the aftershocks of an IPO can tell you). They’re also likelier to achieve a tighter corporate culture on the other side, a reduced risk of public mistakes (like a messy restatement), and a realistic, satisfactory share price.

Kathy emphasizes in the new report, The IPO journey: 6 potential obstacles to avoid for a smooth trip, that going public is much different that actually being a public company. To do it right, companies should view the entire deal as having three phases—the IPO prep, the IPO process itself, and the IPO hangover of suddenly being public. Along the way they should stay away from the following missteps:

Avoiding the tough questions: Kathy reveals the hard questions that need to be asked, including whether the company is moving forward with the transaction for the right reasons.

Skipping the prep work: There are years of laying foundations before the journey gets into the S-1 frenzy, from getting the financial house in order to figuring out the key metrics that will be shared and how they will be expressed publicly.

Being unprepared for a big culture shock: Senior executives rarely consider the transformation employees are expected to go through as the company changes from an entrepreneurial mindset to the more disciplined, accountable organization of a publicly traded company beholden to new regulations. The culture can—and should be—managed during the IPO process.

Lacking the right talent at the right time: Just as the culture should be evaluated, so should the skills. To what extent can existing employees be trained to withstand the needs of a public company, and to what extent does the company need to look outside to fill in the skills gap? It’s better to wonder this as the company goes along—rather than risk overloading employees more than they need to be.

Being in denial about the IPO hangover: There is a hard truth about going IPO and it’s what happens on “Day 2,” the day after the IPO, when the company starts operating in a whole new world, and the next few years that follow. It is a tsunami of work. It takes awhile for everyone to adjust, for efficiencies to take hold and new processes to become routine.

Not actively managing the share price: Many executives think they cannot influence how investors perceive and thus value their company. But it is possible, with effective messaging by company leaders, who need to put themselves in investors’ shoes and hone their storytelling skills to speak their language.

Preempt the mishaps. Prepare the troops. And get ready for the exciting trip that lies ahead. Download The IPO journey: 6 potential obstacles to avoid for a smooth trip.

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Many Silicon Valley companies lack a ‘share price strategy,’ survey reveals

RoseRyan and Assay Investor Perspectives just released their Share Price Survey Results after meeting individually with more than 20 senior finance leaders and directors and surveying others online. We intended to gain an understanding of what private and public companies are doing to actively manage their valuation and share price over time.

It turns out they are making some efforts but lack the expertise and long-term strategy to pull it off well. After the clever pre-IPO road show presentations and after all the investment bankers have gone home, there’s little thought put into creating a comprehensive “share price strategy.”

It’s a hot topic. Share price and valuation always get attention whenever RoseRyan provides thought leadership papers or events on this topic. That’s not so surprising since we are in Silicon Valley after all, surrounded by all the hoopla that accompanies the latest IPO, merger or acquisition – and all the valuations that go along with them.

The excitement is even greater these days as we are in the midst of a busy IPO market. In 2013, FireEye, Portola Pharmaceuticals, Twitter, Rocket Fuel, Veracyte, Marketo and others kicked it off. And the trend is continuing, with anticipation that Box, KineMed, Dropbox, Asterias Biotherapeutics, Square, Spotify, Airbnb and others will soon file as well.

It is amazing how much effort goes into preparing for an IPO. What comes next involves hard work as well. Companies that let the inevitable “post-IPO hangover” take too much of an effect miss out on critical opportunities. Those hot-shot companies will need to take their singular focus off getting to the IPO bell and spend a little time considering how they will maintain their share price and valuation. But most likely they will not. Too often, newly public companies don’t come up with a strategy for how they are going to not only maintain their lofty valuation but also increase it over time.

What to Do Next
Executives usually have two choices to increase their valuation – grow their income or increase their multiple. What the survey results and our discussions show is that companies really don’t understand what the buy-side analysts are looking for. The buy-side analysts’ focus is usually on the multiple and the levers that will move the multiple directly. Most companies focus on increasing net income, which is what most buy-side analysts don’t focus on.

Why is there such a big disconnect? It is centered on the nature of the people doing the work. Most investor relations representatives have either a communications or a sell-side background, and most buy-side analysts have advanced degrees or PhDs in mathematics. And most company executives have MBAs. These different backgrounds can lead to a mismatch in the way these groups speak to each other and understand each other. Basically, they are speaking different languages.

The results of our executive conversations show that this disconnect is causing issues in long-term valuations. Companies’ lack of a solid understanding of buy-side analysts and what really drives share price can expose them to undervaluation. A depressed (from where it should be) valuation impacts recruiting, brand, motivation and culture.

Senior leaders can reverse this trend by deploying strategies that really drive the multiple and having a focused strategy on communicating those strategies to analysts. This does not preclude companies’ need for focusing on increasing income; it just means if they want to supercharge their valuation, they need to have clear strategies that increase their multiple. Read our report, Share Price Survey Results 2013, for the details.

Chris Vane is a director at RoseRyan, where he leads the development of the finance and accounting firm’s cleantech and high tech practices. He is open to discussing ways to positively impact your company’s share price/valuation. Contact Chris at [email protected] or call him at 510.456.3056 x169.

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