The IPO Playbook

1. Going Public: A Strategic Imperative for Enduring Success

If there is one thing I’ve learned from thirty years of dealing with entrepreneurs, CEOs, and venture capitalists, it is that many rational decision-makers will adopt the common practice of their peers in order to save time and effort, rather than actually investigating what is, in fact, the objective truth.

Beyond Liquidation. An IPO is more than just a payday for early investors and employees; it's a strategic move that positions a company for long-term growth, recognition, and impact. While acquisitions offer a quick exit, they often lead to the dissolution of the company's identity and potential. Going public allows a company to build a lasting legacy, attract top talent, and share its success with a broader range of stakeholders.

Economic and Societal Benefits. IPOs fuel innovation by providing capital for research and expansion, creating opportunities for individual investors, and fostering competition. The decline in IPOs has contributed to economic stagnation and wealth inequality, as fewer companies choose to build themselves into powerful, enduring enterprises. Public markets offer access to capital through additional primary offerings, convertible debt, and conventional debt, providing flexibility in challenging times and during periods of growth.

Challenging the Status Quo. The prevailing myth that IPOs are overly expensive, inefficient, and risky has led many companies to pursue acquisitions instead. However, this defensive attitude comes at a considerable cost to entrepreneurs, consumers, and society. By challenging this status quo and embracing the IPO path, companies can unlock their full potential and create lasting value for all stakeholders.

2. The CFO's Pivotal Role: From Business Manager to IPO Architect

There’s no room for a business-managing CFO to gain that experience along the way to an IPO; there is just too much at stake.

Beyond Bookkeeping. The CFO's role in a private startup often revolves around managing cash flow and ensuring financial discipline. However, preparing for an IPO requires a different skill set, one that encompasses structuring the company for public scrutiny, building robust financial systems, and communicating effectively with investors. A "real CFO" with IPO experience is essential for navigating this complex process.

Attracting Top Talent. Companies seeking a CFO with IPO expertise must demonstrate a strong identity, a clear sense of purpose, and a commitment to building a sustainable business. CFO candidates will conduct thorough due diligence, assessing the company's financial health, leadership team, and investor relations. Transparency and honesty are crucial for attracting the right talent.

On-the-Ground Presence. A CFO needs to be on the ground and full-time to build a finance team and become part of the senior management team. Values, common language, and direction are established through ongoing conversations, and if your CFO is not part of the conversation, your CFO will not be part of the direction setting.

3. Stakeholder Alignment: Ensuring a Unified Vision for the IPO Journey

Do we want to walk away from what we’ve built, or do we want to develop a business with a lasting future?

Cash Needs Assessment. Before embarking on the IPO path, it's crucial to assess the company's cash needs and determine whether additional funding is required. This involves evaluating the monthly burn rate, exploring cost-reduction strategies, and securing commitments from existing investors. A sustainable business model with a clear path to positive cash flow is essential for attracting public market investors.

Ownership and Dilution. Seeking additional funding may require surrendering more ownership, potentially diluting the stakes of founders and early employees. It's important to carefully weigh the benefits of additional capital against the potential impact on equity distribution. Anti-dilution clauses and cash-up-front business models can help ensure that founders and employees receive their fair share of returns.

Sustainability and Long-Term Vision. Every company needs a vision and a model for execution to get to cash flow positive. To maintain sustainability, every company should have three scenarios in development, in order of desirability: IPO, find another VC to invest in the company, or find that bigger company to sell out to.

4. Assessment Imperative: Rigorous Evaluation for IPO Readiness

You will notice that some of the recommended areas for assessment listed below will represent big changes for your company in the future.

Business Model and Drivers. A thorough understanding of the business model, including revenue drivers, cost of goods sold (COGS), and operating expenses, is essential for IPO readiness. Comparing these metrics to those of peer companies can provide valuable insights and identify areas for improvement. However, it's important to select peer companies wisely and consider the context of their operations.

Sales Team Capabilities. Assessing the sales team's capabilities is crucial, as the sales organization often needs to evolve to support continued growth. This involves evaluating the team's experience, processes, and ability to build trusting relationships with customers. Transitions in sales leadership may be necessary to scale the organization effectively.

Finance and Legal Team. The finance and legal team must be upgraded and hired to help grow the business. This group needs to have a variety of skills, including a technical understanding of accounting and internal controls.

5. Building the Right Team: Talent Acquisition and Cultural Harmony

Hiring to bolster the team’s weaknesses is critical to ensure all areas of the business are covered.

Beyond Skills. Building a successful team requires more than just technical expertise; it also requires cultural fit and a shared commitment to the company's vision. Hiring individuals who align with the company's values and can adapt to its evolving needs is crucial for long-term success. The ability of the existing team and founders to integrate newcomers is critical.

Engineering and Product Development. In engineering and product development, you need to hire engineers who can master these changing environments in order to maintain the company’s competitive advantage and to ensure its product lines keep their freshness.

Sales and Marketing. In sales, marketing, and finance, establishing known, successful processes can facilitate rapid growth. In these areas, experience counts more than rule breaking.

6. Systems as Enablers: Investing in Scalable Infrastructure

Systems not only provide the data you need to run a business; they can shrink the cycle time of any process and reduce the error rate.

Beyond Spreadsheets. Investing in robust information systems is essential for scaling operations and preparing for public company scrutiny. Excel spreadsheets managed by a single person are not a system. It is a slow-paced process fraught with errors, and while it may appear inexpensive, it most certainly is not, given the long-term costs that result from inaccurate and untimely operating data.

Cloud vs. On-Premises. Cloud solutions offer greater flexibility, scalability, and cost-effectiveness compared to on-premises systems. However, it's important to resist the temptation to customize cloud solutions, as this can hinder upgrades and limit access to new features. Instead, focus on adapting processes to fit the solution.

Core Systems. The core systems include general ledger (GL), billing, and human resources management system (HRMS). These systems form the critical center of your data infrastructure. Your selection review should include performance benchmarks and compatibility, and you should discuss with each potential vendor the working relationships they have with the other vendors.

7. Governance as Foundation: Establishing Trust and Transparency

Governance in business can be defined as the processes that ensure the effective and efficient use of resources enabling an organization to achieve its goals.

Beyond Compliance. Good governance is more than just adhering to regulations; it's about establishing a culture of transparency, accountability, and ethical behavior. This involves implementing robust internal controls, documenting processes, and fostering open communication. Good governance takes a number of forms: accounting for the business and the subsequent financial reporting of that accounting, information technology systems and processes, board operations and decision-making, how the business describes itself to investors, and timely disclosure of all of this information, in compliance with SEC and exchange rules.

Board Composition and Independence. Selecting board members with the right skills, experience, and moral values is crucial for setting the tone at the top. Independent directors, particularly those serving on the audit and compensation committees, play a vital role in ensuring objectivity and protecting shareholder interests.

Accounting and Financial Reporting. The process of implementing accounting and financial reporting starts with very basic questions: Are each of the accounts reconciled by an accountant? Is that reconciliation reviewed by another person? Did that person sign and date when they conducted the review and note any corrections that took place?

8. Banker Selection: Prioritizing Expertise and Alignment

You must know yourself first before you try to get others to know you.

Beyond the Pitch. Selecting an investment banking team requires careful consideration of their expertise, track record, and alignment with the company's vision. It's important to look beyond the flashy presentations and focus on the individuals who will be actively involved in the IPO process, particularly the sell-side research analyst.

Sell-Side Research. The sell-side research analyst plays a crucial role in communicating the company's story to investors and influencing their perception of its value. Look for analysts who understand the business, ask good questions, and can adapt to changing circumstances.

The S-1 and Road Show. The banking team can assist with crafting the business section of the S-1 and developing the road show pitch deck. However, it's important to maintain control over the messaging and ensure that it accurately reflects the company's vision and strategy.

9. Investor Engagement: Cultivating Long-Term Partnerships

Sharing the success of a growing company is part of the journey.

Beyond the IPO. Building relationships with investors is an ongoing process that extends far beyond the IPO. Engaging with investors, educating them about the company's story, and addressing their concerns are essential for fostering long-term partnerships.

Identifying Target Investors. Understanding the different types of investors—growth, value, long-term—and tailoring your messaging accordingly is crucial for attracting the right shareholders. It's also important to identify and avoid investors who may have a short-term focus or a negative bias.

Transparency and Honesty. The best way to build trust with investors is to be open and honest about the company's challenges and successes. Candor and transparency will foster long-term relationships and insulate the company from short-term market fluctuations.

10. IPO Day and Beyond: Navigating the Public Arena

I always look upon going public day as a single point in time.

Celebrating the Milestone. IPO day is a significant achievement that should be celebrated with employees, investors, and other stakeholders. However, it's important to remember that it's just the beginning of a new chapter. The real work begins now, as the company must deliver on its promises and navigate the challenges of being a public entity.

Maintaining Focus. The primary focus after going public should be on running the business, forecasting results, managing cash, hiring talent, educating shareholders, and complying with SEC regulations. It's important to stay disciplined and avoid distractions that can derail the company's long-term goals.

The First Earnings Call. Your number one focus now is to get ready for your first-ever earnings call, just eight weeks away. This call sets the tone and expectations for going forward. In fact, this is the most critical earnings call you have to inaugurate your new duties as a public company.

Last updated: February 26, 2025