NASDAQ Panel: How to Succeed as a Newly Public Company

I recently had the pleasure of participating in a panel as part of a NASDAQ workshop on IPO preparation. The topic was “How to Succeed as a Newly Public Company”.

The panel was moderated by Conor Moore, National Co-Leader Venture Capital Practice at KPMG. The other participants were Jennifer Pileggi, Senior Vice President, General Counsel at Zuora and Lee Kirkpatrick, the former CFO of Twilio. Both Jennifer and Lee had taken their companies public and I've been CFO for two successful NASDAQ IPOs (CBS MarketWatch and Rocket Fuel).

Any executive of a company large enough to go public is accomplished and experienced in completing hard jobs. I found myself thinking about what makes an IPO a particularly challenging undertaking and I believe there are four factors:

1. A relatively small number of people have taking companies public, so there is an "on the job training" aspect to it and a sense that there might be a surprise around the corner. And going and being public is as large and complex as corporate projects get.
2. To a greater or lesser extent, an IPO impacts everyone in the company.
3. The shift from private to public impacts not just financial, legal, and administrative activities but also more nuanced aspects of company culture. This includes the kinds of people that are attracted to the company, the potential for turnover in newly liquid employees, how and to whom information is shared, and compensation.
4. Being public and the sometimes irrational daily report card provided by the stock market creates inexorable pressures and demands (from the board, investors, employees, and customers) that can be hard to foresee and hard to manage. And once public you can't turn back the clock.

The panel reviewed lessons learned and talked about things they might have done differently. The primary focus was risk mitigation vs. maximizing valuation although being smart about risk is key to building and maintaining value.

In some ways, the recommendations may seem obvious: more planning, more resources, more time, and more experienced people are the ingredients to making any complex project successful. The key takeaways are which resources matter most and when to deploy them.

Key points made by the panel:

• Lee Kirkpatrick shared a quote from one of Twilio's board members at the time of the IPO that rang true: "100% of companies that have gone public were understaffed for the task at hand". Successful tech companies tend to drive revenue growth by investing heavily in R&D and Sales and Marketing to the detriment of G&A and infrastructure. Recognizing and addressing this imbalance is key to creating the conditions for success once public. Note that this requires a conscious shift in priorities -- a cultural shift.
• High growth companies tend to be focused on the next few quarters and in a world of agile development and rapid market changes this makes sense. But being a successful public company is more about mastering complex activities, policies, and procedures than it is about rapid development and moving fast and breaking things. A two-year IPO plan will allow for better expense control (no panicked last-minute calls to vendors) and more importantly allows for real-world testing: how quickly can you close the books (including outside audit firm and board review), are your forecasts accurate enough to withstand public scrutiny, can you prepare a well thought out earnings script, do your key metrics respond the way you expect over time, and can the legal and accounting teams get the required filings done? Note that again this requires a conscious shift in how the business operates -- another cultural shift.
• Public company responsibilities can be both arcane and risky. These include SEC filings, dealing with influential outside governance entities (ISS, etc), the formalities and requirements of post IPO board meetings, and the intricacies of public disclosure. Other new responsibilities require a much higher degree of precision or timeliness such as forecasting EPS to the penny or preparing an earnings script. Hiring a small number of people with previous public company experience can significantly accelerate IPO readiness around the entire company. Key roles could include the CFO, Controller, head of FP&A, Chief Accounting Officer, General Counsel, SEC Reporting Manager, Chief People Officer, and an analytically oriented Compensation Manager. Technology companies often do very well hiring "the best athletes" and letting them figure things out as they go. In growth companies, this is a terrific way to attract and incent people but it is risky in these roles. Over-indexing on experience can represent another cultural shift (seeing a trend here?).
• Creativity drives success in technology companies. But not everything should be disrupted. Be creative when it matters: in product, sales, and marketing. Unless there is a truly compelling reason, it is easiest and most effective to work within Wall Street's standards. This topic came up around the idea of not providing guidance and with respect to establishing metrics. Every CFO contemplating an IPO fantasizes about avoiding guidance but very few companies can get away with this (and if you don't provide guidance investors will make their own assumptions which you will then have to live with). Regarding non-GAAP metrics, recognize that public investors are busy and have limited bandwidth to absorb any one company's details. Therefore, if you can work with commonly understood metrics you will be able to keep investor conversations focused on strategic and value related issues, not on why your metrics are different. That said, if you have created unique measures that provide truly useful insight to investors it can be worth the effort. As a private company Twilio created several metrics that were important in how they managed their business and they wanted to continue to use these benchmarks. With education, investors came to understand the measures and the company successfully utilized them post IPO.
• The relationship between HR, Finance & Accounting, and Legal is always important but post-IPO becomes even more critical. Public companies have more risks than do private companies and also a higher risk of unintended consequences. Best practices for these teams include weekly meetings, a much more formal and active approach to risk management, and close alignment with the AC, Nominating and Governance, and Compensation Committee Chairs.
• For many employees, one of the most attractive aspects of working in a high growth company is the open culture, sharing key activities across departments, seeing real-time financial and operating results, and feeling included. Reduced information sharing and a loss of a sense belonging can be a driver of post-IPO friction and attrition. The consensus from the panel is that thoughtful education and management of the issues will ameliorate some of these issues but that it is wise to be prepared for some attrition. Proactive education about the risks of information sharing (both to the company and individual employees) was effective, especially with engineering teams who are often used to having access to customer data. Post-IPO Twilio deliberately over-indexed on employee reviews and communications with at-risk groups and all of the companies addressed the issues early on in all hands and other meetings. Zuora educated their recruiting teams on the benefits of joining a larger more financially stable company that continues to have many of the fast-moving advantages of a startup.
• The group experiencing the most change post-IPO may well be the board of directors. Private boards have significant flexibility while public company board's operations are formalized and constrained. Just as it makes sense to bring in employees with public company experience significantly prior to the IPO, board efficacy accelerates with the addition of experienced members, particularly board members with Audit, Nominating and Governance, and Compensation Committee Experience. Predicting when VC board members will move off the board can be difficult (as it tends to be driven by the pace at which they liquidate their holdings). Having a pipeline of qualified potential board members is a useful mechanism for filling these openings.
• The group agreed that working with the board and its changing makeup and deliverables requires significantly more forethought and collaboration. In particular, this includes pre and post-meeting phone check-ins with all the committee members (not just the committee chairs) and explicit planning vis-a-vis deliverables and deliverable dates.
• Conor asked the panel for input on how to deal with the inevitable bump in the road or bad quarter that hits every public company. The panel's consensus was to first evaluate the real impact of the issue with ruthless honesty. You can't communicate effectively about a problem, much less work through it, without truly understanding it. Having done so, the panel advised that when resetting expectations they be reset low with plenty of room for future out-performance: What's worse than disappointing Wall Street? Disappointing Wall Street several quarters in a row and losing all credibility. The panelist also recommended working internally to tamper the natural excitement that comes with good quarters which causes employees to over-focus on short term results.
• The closing question was the one thing that people would do differently if they had to do things all over again. The clear consensus winner was to hire more people with IPO and public company experience sooner.