On January 4th, the first business day of the new decade, Dow Jones VentureSource released figures suggesting that 2010 will be a stronger year for IPOs. They reported that eight companies completed public offerings in 2009, raising $904 million. This was a 64% increase from the $551 million generated through seven IPOs in 2008.
Looking ahead, VentureSource pointed to the 25 venture-backed companies that are currently in IPO registration as a sign that the market will improve as this year unfolds. The larger attendance and stronger sense of optimism at the most recent Deloitte Tech-Venture IPO Bootcamp, where I spoke on IPO investor relations, suggests the same thing.
So if the proverbial IPO window does open wider in 2010, a good number of venture-backed companies probably will jump through. This will send them into the hectic time of pre-IPO preparations.
Like skilled gymnasts or freestyle skiers, some of these companies will stick the landing. They’ll see good liquidity and strong underlying demand when their shares begin trading. Others will lose a few style points and generate only a tepid response from investors. For the underperformers, the leap into the public markets will conclude with a painful face plant.
Perform the inevitable post mortem on any IPO, and you can come up with all kinds of reasons why the newly public company’s stock has behaved the way it has. Boiled down, most of these reasons will revolve around one thing – a failure to establish and sustain investor trust. This is a red flag that, absent an unforeseen event, usually signals a breakdown in the flow of information between the executive suite and the investment community.
The cause of these breakdowns typically traces back to management mistakenly thinking about their IPO planning as a 100 yard dash. They see it as a race from the S-1 filing through the pricing and the quiet period to the first few weeks of trading. But IPOs are not one-time transactions. Going public inevitably means undergoing a longer-term transformation that affects every aspect of corporate life, making effective preparations for an IPO is more like a marathon than a sprint.
The successful IPOs tend to be those in which the concept of long-term transformation shapes the planning for everything – including communications. The marathon starts at least a year earlier or more, even before the initial interviews with prospective investment bankers.
At this stage, it’s important to get in the habit of thinking and acting like a public company:
- Issue press releases on a regular basis, announcing corporate events and milestones that would be material information for investors if the stock were actually trading.
- The CEO and CFO will be doing weeks of roadshow presentations. If their speaking skills aren’t top notch, they should get some coaching.
- Corporate disclosure and other public company policies should be in place early, and management and all employees should be educated about their new disclosure responsibilities before the IPO.
- It’s key to decide in advance on the approach to financial guidance and, if guidance will be given, to establish the proper set of metrics.
- Spokespersons should be identified and prepared to handle investor and media inquiries well before the pricing.
- The IR website — a key resource for both individual and institutional investors — should be ready to go.
Much has been said and written about the importance of IPO investor relations planning. And certainly, executing IR strategy before the pricing can be challenging given the competing demands on management’s time. But the essence is simple. Most institutional investors believe that the quality of a company’s IR program positively or negatively affects its valuation. And the buy-side’s perceptions of IR quality revolve around three Cs: candor, credibility and consistency.
Make connections and establish trust with the investment community early in the IPO process by being transparent and honest. Build that trust by delivering a steady stream of timely, relevant information within the parameters of disclosure regulation. Then reinforce the trust over time by avoiding surprises and being open, responsive and respectful of investors and their needs for timely and truthful information. Thoughtful, comprehensive IR planning is the key.
President and Partner