KEY LESSON: Be prepared. Decisions made before the IPO can have lasting implications long after the IPO.
In this chapter, I am going to use broad strokes to walk through the IPO process. My goal is to tee up the next few chapters which focus on companies making good first impressions with investors. This chapter is NOT a definitive guide by any measure. The lawyers and bankers provide that, and I lack their expertise. Instead, I want to hit a couple high (low?) points of the process, the key decision making points.
The Early Days
Companies typically find themselves meeting bankers long before they even decide to go public. Good bankers are pro-active, seeking out promising companies, or portfolio companies of prominent venture capitalists who they know. This leads many management teams to think they are well prepared for the IPO, having heard about it from bankers for years ahead of the fact. By this point in the series, it should be clear that this is not the case. To put it delicately, bankers may be pre-disposed to highlight the positive aspects of an IPO.
In the next stage, management teams start to prepare for going public. This is not a final decision, but there is a lot of preparation work required. The CFO brings in the auditors and starts getting the accounting systems up to speed, and starts installing a whole new compliance regime. Costly. Not entirely useful, but a requirement. The auditors then start preparing financial reports that look like actual quarterly filings. Similarly, the lawyers start to get more involved around here and begin handling capital markets questions in addition to the regular business issues about which they have already been advising.
As plans for an IPO get more serious, it is time to pick bankers. The bake-off or beauty pageant rolls around. Multiple banks send teams of people in suits. We walked through this in Chapter 5. Soon after, the company picks its bankers, and the real preparation work begins.
Now come the ‘Org Meetings’, in which all of the underwriting syndicate get together with management to get on the same page. Management gives the bankers a deep dive into the company’s operations. The bankers and lawyers search for their respective hot button issues.
This leads to preparation of the S-1 (or Prospectus) and other SEC filings. My sense is that this drafting process is one of the earliest, time-intensive executive interactions with the IPO process. These things can suck up days of non-stop, looked-in-the-conference-room meetings. So here’s a PRO tip If you have a really good head of marketing, make sure to involve them. For me, the S-1 is one of the hardest corners to turn in the IPO process. Companies can sound so exciting when they are private, but nothing is as sobering as reading an SEC filing.
We have now reached the point of no-return. Companies that file to go public and then pull the IPO often have to wait an extra period of time before being able to file again, or suffer some other form of informal punishment that makes the IPO process harder. So once everything is ready, companies need to make a big commitment.
Assuming that decision is a yes, management teams now begin dipping their toe into the water of public markets.
First, the team holds another Org Meeting with all the research analysts. (This used to be held in conjunction with the bankers, but post-1990’s regulations changed that.) Good analysts often know private company management teams ahead of this time, but this will be the company’s financials’ first impression on the research team. I have seen many IPOs die in this room. Management teams can tell they are in trouble when they post their financial projections and are met with silence. When analysts see numbers their natural inclination is to ask questions. But they are under pressure to be respectful to management teams, so when they see something they do not like, they realize it is better to say nothing. This is one of those moments where the bankers and public markets (in the form of analysts) really diverge. Not all companies will make good stocks for investors. Analysts have to justify their investment thesis on all of their stock recommendations a dozen times a day, so they have a decent sense of what will work. At this stage, the unveiling, analysts want to be helpful, but also recognize that there are limits on what the public markets will accept.
This is a key turning point for the IPO process. The whole point of this series is to highlight the importance of setting expectations. Those expectations are born when analysts first see these numbers. Management teams need to present something that is close to what they ultimately want the Street to expect. The next two chapters are dedicated to how to achieve this.
After this, bankers and analysts will ask for other forms of due diligence in the form of outside reference calls with customers and suppliers. These are usually very straightforward, but I mention this now because it is something that may take some time to prepare, better to think of it early.
The Big Day Approaches
After these are done, the company usually has a big To-Do list with items from all constituents that they need to work through. Once these are done, at some point, management teams and their boards make the final call to file publicly.
This is then followed by more To-Do items, often revolving around the SEC’s response to the S-1 document. But now everyone is expecting an eventual IPO.
Once are the legal items are cleared and the underwriters think the company is ready, it is time for the roadshow.
In this, the management team travels the country and sometimes the world in a very short time period. They present an overview of the company and its financials all boiled down to a one-hour PowerPoint deck. (Obviously, preparation of this deck began far earlier.)
For many executives, the IPO roadshow is a once-in-a-career event. It is pretty horrible from a daily life perspective, but also amazing. The road show usually takes eight to fifteen business days. Management teams give the same presentation to as many investors as possible every day. In Boston or New York, where travel times are relatively short, this can mean giving the pitch ten times a day. Motion is constant. Get up. Go to meet investors. Then the next meeting. Then the next. Lunch, if it comes, is out of a box or two mouthfuls over a lunch meeting where there is too much talking to be done. The day ends with either a dinner meeting with a handful of investors or on a plane to the next city. Repeat.
The road show tests stamina and sanity. It is one of those things that is ‘fun’ in hindsight. And remember every one of these meetings count. Investors are forming their first impressions of management team and building models of what they think the stock is worth. A good road show can have a huge impact on a stock’s valuation. So, no pressure.
And remember, during this two or three week process, management teams are having to finalize their financial filings, and, you know, run their business remotely.
At the end of the roadshow, the underwriters all huddle together the night before the IPO and match investor demand to supply of the stock, setting the IPO price. There are all kinds of complexities here, some of which I will touch on in later chapters. But in reality you can pick your metaphor – smoke-filled room, Black Box, inscrutable cult – somehow the price for the IPO is set. (Ask all your underwriters how it works, but ask them separately and compare their answers. )
Management teams typically spend that night in New York so that first thing the next morning, they can ring the bell at the NYSE or push the button at NASDAQ. Then stock starts trading.
That’s it. Time to get back to your day job.
This is Chapter 6 in “A Practical Guide to IPOs”. You can find Chapter 1 here and Chapter 5 here.