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The IPO Software Stack: What You’ll Need Before Going Public
Insights from EY Consultants
When it comes to preparing a company for an IPO, much of the focus gets placed on the financial, legal, and capital markets prep work. But behind the scenes, there is an entire network of systems, processes, and technology that a company needs to successfully transition from private to public life. Leaping into the IPO process without those systems and processes is a bit like bringing your everyday commuter car to a Formula 1 race.
Just ask Ken Englund, Principal for EY Consulting and leader of their Technology sector for North America, and Monique Christensen, Director at EY and a leader in their Technology sector for the West region, who have coached dozens of private companies through their pre- and post-IPO systems needs. Ken advises CFOs and CEOs to understand that investing in the right technology at the right time can be the foundation for a strong public market debut or an unintentional roadblock – it all depends on how well those systems are thoughtfully assembled, integrated, tested, and deployed.
Founders Circle Capital recently sat down with Ken and Monique to learn about the core elements of a IPO-ready software stack. In this guide, we break down three systems every growth stage private company needs, the role each system serves, and common pitfalls to avoid.
Looking for Specific Vendor Recommendations?
If you’re looking for specific vendor recommendations from other finance leaders, apply to join our CFO|Circle where members have access to a private database of software and solution ratings and reviews from their peers. Below are some of the most popular software systems used by our public company CFOs.
Start With the Foundation
Before researching specific vendors or systems, EY often advises leaders to align their IPO software stack with two foundational elements:
Private company leaders often make the mistake of leaping into discussions about ERP systems, reporting needs, and governance policies before considering how those solutions will roll up to the overall business KPIs. If you’re laser-focused on the financial health and growth of the company, your IPO software stack should always be in service to helping identify, track, and improve those KPIs.
It’s also important to document all of your internal legal, IT, and governance policies. In addition to complying with Sarbanes-Oxley (SOX) and other IPO requirements, every piece of software in your system should align with your internal policies. Keeping those policies top of mind right from the start can help identify problem areas or policy gaps that need to be addressed.
The 3 Categories of Systems Every IPO-Ready Company Needs: Transactions, Analytics, and Controls
The most critical software and systems you’ll need to transition to public life fall into three categories: transactions, analytics, and controls.
- Revenue recognition/aggregation software
- Order-to-cash management system
Why They’re Important
Transactions tell the story behind the numbers. Not just money flowing in and out of the business but how customers are entering the sales cycle, how contracts are being set up and processed, and how sales are being recorded.
A good transaction system should track and measure that entire process across the whole enterprise so that externally investors have confidence behind your reported numbers, and internally you can accurately forecast growth.
When to Start Building
18-24 months prior to planned IPO
There are two key components to a transactions system: revenue recognition and order-to-cash management. Revenue recognition is a common roadblock during the pre-IPO audit that you’ll need to solve in order to ensure compliance with ASC 606 revenue recognition standards for general ledger reporting. However, order-to-cash management is important for building a more holistic view into everything that happens before revenue is recorded, from when a customer submits an order to the entire cycle of events that happen before it shows up as cash on the general ledger.
As you look for software solutions that can provide greater transparency at the transaction-level, think about how your revenue model or order-to-cash cycle might change over the next few years. You can start with an MVP solution for now but if you’re considering a move between a subscription, consumption, or hybrid pricing model or have global expansion in mind, you may want to invest in a more robust solution. “Whether you buy or build, choose a system that is scalable and flexible,” said Ken.
- A centralized repository for all of your data.
- Strong data governance policies.
- A designated data steward (i.e. a Chief Data Officer, CIO or hybrid Finance/CTO function) with close collaboration between finance, legal, and IT.
Why They’re Important
Data integrity is crucial as a public company, both for ensuring compliance with regulatory and financial standards and providing confidence in the numbers when forecasting.
When to Start Building
Varies depending on how data-centric the business is; usually happens alongside systems implementation.
Companies often underestimate the level of investment needed to get their data and analytics up to a level that is IPO-ready. It’s not simply a matter of having the right data at your fingertips; your data needs to be immutable in order to provide auditors and prospective investors confidence in the numbers. While SOX compliance is often the catalyst for pre-IPO data initiatives, companies should start as early as possible as data leaks or discrepancies can easily delay an IPO timeline and lead to compliance and regulatory risks post-IPO.
When building the analytics engine of the IPO software stack, the CFO can lead the conversation (again, tying it all back to KPIs and data governance policies) but should work closely with Legal, IT, and engineering. While it may be tempting to go out and buy the “best of breed” ERP or analytics software, remember that interoperability across the business is the key to making it all work.
- SOX 404 controls
- ELC controls
- Tight interdepartmental collaboration
Why They’re Important
While assessing internal controls is a requirement under SOX compliance, it is also important for holding every key stakeholder in the company to public company standards.
When to Start Building
At least 12-18 months out from an IPO.
Controls establishment is an evolving process but you’ll need the major controls in place and can automate and improve over time.
Every company will have to stress-test their internal financial systems – Accounts Payable, Payroll, Accounts Receivable, etc. – as part of SOX compliance. The difficulty is often not in establishing the controls, but in ensuring every team understands how to follow them and is willing to adjust their workflow to those controls.
“Controls implementation can be a culture shift or change management exercise,” said Monique. “EY offers SOX 101 training for engineers, for instance, so that the engineers understands how product and platform changes need to be completed in accordance with SOX requirements. It’s a delicate balance between rolling out these new policies and procedures and not slowing down product and engineering.”
Allow 12-18 months for control establishment to fully take shape, whether you choose to buy or build. If you choose to build using internal engineering support, keep projects under six months in order to keep your team’s focus primarily on product and business. If you choose to buy, avoid customization as you don’t want to test the entire system after every quarterly update to ensure it doesn’t break.
[For more insights on how to align engineering, finance and operations leading up to an IPO, check out this helpful guide from Ken and the EY team.]
For companies on the road to the public markets, a robust IPO software stack is an essential tool for success. Building that software stack helps companies go through the exercise of acting public before actually going public, and the sooner that process begins, the better.
- Companies should start investing in their software stack early (at least 2 years out from an IPO).
- Start by building the foundation: ensure your business KPIs and internal policies are driving the development and implementation of your software stack.
- The Transactions element of your system should track the full cycle of your financial operation, from product pricing, business contracts, and order management all the way through to accounts payable and payment processing.
- Supporting your financial planning and reporting is a robust Analytics infrastructure that ensures all of your data is centralized, accurate, and accessible by the right parties across the organization.
- Anchoring the IPO software stack are IPO-ready Controls, which ensure SOX compliance and enable tighter interdepartmental collaboration pre-and post-IPO.