The Road to IPO: IPO Readiness in Uncertain Times From Three-Time IPO Veteran Steffan Tomlinson

Private company CFOs preparing for an IPO in the not-so-distant future are facing a new reality. Increased market volatility, record inflation, and fears of a recession have left many re-evaluating their timeline and wondering what their IPO readiness plans should look like in the meantime. 

Having led the private-to-public transition as CFO for three companies, Steffan Tomlinson is no stranger to the rigors of IPO readiness. As CFO of Aruba Networks, Steffan helped grow revenue from $12 million to $450 million and successfully took the company public in 2007. In 2012, less than six months after joining Palo Alto Networks, he helped the company raise $300 million in its IPO. More recently, at the height of the pandemic in 2021, Steffan helped lead his current company Confluent (a Founders Circle portfolio company), to an $800 million IPO, the third-highest valued IPO on a multiple basis in the history of software.

Throughout his IPO experiences, Steffan has learned to expect the unexpected. While there can be no way to predict how the journey will unfold, CFOs can best position themselves by using the basic principles of IPO readiness to “be deterministic about charting [their] own path to success.”

As part of our “Road to IPO” conversation series, Steffan recently sat down with CFOs in The Circle to share his experience and perspectives on the current macroeconomic climate and to give his peers a framework to think about IPO readiness irrespective of market volatility.

Here are some of the takeaways from the conversation:

The Importance of Taking a Long-Term View

The IPO market has changed significantly since Steffan’s first IPO experience in 2007. Not too long ago, SPACs and direct listings were nascent, IPO roadshows happened in-person instead of virtually, and valuations and forward multiples were a fraction of where they have risen in the last few years. Moreover, IPO stock price performance and shareholder wealth creation expectations have increased.

Now, as companies navigate an evolving IPO market amidst signs of a market downturn and markdowns on valuations, Steffan advises CFOs in the IPO planning stages to stay focused on the long-term goal:

“There’s going to be volatility in your stock price, especially right now with so many macroeconomic factors impacting the psyche of the market. What we as CFOs can try to do is focus on what we can control, and that’s long-term value creation. If we do what we say we will do, we will create value over time.”

Focusing on long-term growth and value creation is crucial for preparing for life as a public company and calibrating your employees’ expectations. Employees are likely nervous about the impact of the current market conditions on the company’s IPO (and their stock returns), which is why CFOs need to spend time walking them through what’s happening in the market while extending the focus to long-term growth – not just IPO performance.

Three Frameworks for IPO Readiness

Diving deeper into what companies can do to stay IPO-ready in uncertain market conditions, Steffan outlined three frameworks companies should have in place before considering going public:

1. Growth and Profitability – Every CFO needs a realistic model for measuring and improving profitability and operating margins before going public. Steffan has found success in creating mid-term and long-term target models for profitability based on annual revenue growth. “In this environment, having a growth and profitability framework will help your management team and employees understand how resources are being allocated in the context of this framework,” he added.
2. Capital Structure and Allocation – CFOs also need to thoughtfully define their capital allocation framework, which includes investment in the business, M&A, and return of capital to shareholders. That framework should tie directly to the growth and profitability model so that all of the metrics that influence the growth of your business– from LTV to retention and sales productivity–are aligned. 
3. Predictability – Having confidence that you can hit your targets is critical to being a public company. “As you get closer to the IPO, you have to start practicing like you’re going to play,” said Steffan. You should be able to deliver on your commitments every quarter to your board and have a narrow variance range between expected and actual results. “The last thing you want after going public is to miss earnings. That’s why you should implement strategies like a public company, especially from an FP&A standpoint, to get that cadence and rhythm down.”

Six Best Practices for the IPO Process

Steffan offered several pearls of wisdom for CFOs gleaned over the course of planning and executing three successful IPOs:

1. Create a Comprehensive IPO Checklist – Hundreds of small tasks and projects need to be completed before you can go public. When you’re a few years out from going public, it’s essential to have all those items in one place to reference and track your progress against them.
2. Improve Unit Economics and Predictability – As you build that predictability into your business model a few years out from IPO, you need to define and measure all the inputs to productivity because that ultimately impacts your top-line revenue. Everything from how you’re segmenting the market to how you are onboarding, training, assigning, and compensating sales teams. “There were roughly a dozen inputs to productivity in our model, and we needed visibility into all of them,” said Steffan. As you get about a year out from the IPO, you want to test that financial predictability by aiming at least three consecutive quarters at or above all the top-line metrics.
3. Tackle Operational and Systems Readiness Simultaneously – Before deciding to go public, it’s essential to ensure your business performs against internal expectations. Part of that will come from building out the predictability framework and your FP&A organization; however, you should simultaneously be gathering and integrating all the systems, processes, and operations needed to have complete visibility across the entire organization.
4. Start Team Building and Organizational Design Early – Ensuring you have the right organizational design and team members to transition from private to public can take longer than expected. “You need to make those organizational design changes pretty far in advance to make sure that as people find their new roles, or if you’re bringing in new hires, those individuals have time to absorb their new role and learn how to partner with the rest of your IPO team,” said Steffan. Specifically, Steffan recommends building out the FP&A, accounting, and revenue recognition functions as early as possible. 
5. Develop Strong Buy-side/Sell-side Relationships – Similarly, taking the time to cultivate strong relationships with your underwriters and build your investor syndicate is essential to being IPO-ready. “You’ll want to do plenty of test the water meetings to understand how much groundwork you need to lay with the investment community before going public.” Steffan recalled that with Confluent, their story and business model were more complicated, so spending more time with the sell-side analysts provided great feedback on company positioning and refining the investment pitch. 
6. Bring on Additional Third-Party Partners – Having reliable third parties to support with financials, accounting, or other project-related work can be a force multiplier when you find the right firm to stick with you as you grow and scale. Steffan recommended hiring an external investor relations firm as you get closer to going public to help refine and evangelize your message to the broader investment community.

Preparing for Life as a Public Company CFO

As first-time-going-public CFOs look ahead to what it takes to leap to public life, Steffan concluded by emphasizing that being a public company CFO requires confidence and mastery of the details:

“You’re the steward of capital. When you show up in front of the board or management team, you need to have a full, detailed understanding of not only the numbers but also the drivers of the business. I recommend spending a lot of time with your Head of Product to understand the technical differentiation of your solution. Understanding that value proposition shows the board you have a fundamental grasp of the business.”

The Takeaway:

As market uncertainty continues to unfold, private company CFOs can find greater agency by focusing on the aspects of IPO readiness that are within their control, from improving predictability and accountability to assembling the people, processes and systems required to transition to public life.

Discover more pearls of wisdom about IPO readiness from battle-tested CFOs in our IPO Readiness Guide. If you’d like to participate in future discussions like this one, we encourage you to apply to join The Circle.