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The 2022 IPO Readiness Guide for CFOs
Advice on Staying IPO-ready from Battle-Tested CFOs
As companies prepare to transition to the public markets, the importance of IPO readiness cannot be understated. Getting the right systems, processes, and people in place to handle the rigors of being a public company can be an arduous task for any CFO, particularly during uncertain market conditions.
As IPO readiness is a topic that comes up frequently in our Circle community, last year we kicked off the inaugural IPO Readiness Guide. which compiled together the insights and key takeaways we’ve gleaned from CFOs that have successfully taken their companies public. However, in 2022, the IPO market looked very different from years past.
Prolonged market volatility managed to flip one of the most active years for IPOs on record into the least active year in over two decades. IPO listings dropped nearly 60% year-over-year as companies sought to avoid inhospitable public market conditions.
The decline was even sharper in the SPAC market. After SPACs saw an unprecedented rise in popularity in 2021 as an alternative means of going public, the number of SPAC issuances dropped from 613 In 2021 to only 84 in 2022.
Two CFOs in our community who took their company public via SPAC said that while SPACs aren’t going away anytime soon, a lot needs to be improved in the overall SPAC process before they become a legitimate alternative to the traditional IPO. “SPACs aren’t immune to market volatility. In fact, they are directly impacted by it,” said one CFO. “Just like IPOs, if SPACs are underperforming and unable to merge (as many have in 2022), investors will be less likely to pay the SPAC premium, and banks will be less likely to want to underwrite them,” one CFO said. As the IPO market remains quiet, more companies might consider a SPAC as an alternative financing method in 2023. However, they should anticipate more federal regulation and less appetite among SPAC sponsors while market conditions remain uncertain.
The Importance of IPO Readiness
So then, if companies aren’t planning to go public in 2023, should CFOs of later-stage companies abandon or de-prioritize their IPO readiness efforts? The resounding feedback from experienced leaders is – absolutely not.
If we’ve learned anything over the course of our “Road to IPO” AMA series, it is that IPO readiness is a multi-year effort. Building the discipline and ability to function as a public company takes time, and the earlier a CFO starts, the better-positioned they will be for long-term success.
To that end, below we’ve compiled some of the key insights on staying IPO-ready we’ve heard from the CFOs of companies that recently went public and other experienced leaders in our Circle community.
We’ve broken down IPO readiness into three key stages:
3+ Years From an IPO
Companies that are a few years out from an IPO should start building the operational muscle to be ready to go public.
Navam Welihinda was a first-time CFO when he took Hashicorp public at the end of 2021. He learned that as CFO, you can never overestimate the amount of time it takes to get the finance side of the business ready for the rigors of public company life.
There are three key areas within a company’s financial framework that veteran CFO Steffan Tomlinson recommends focusing on in order to be IPO-ready:
- 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. “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 said.
- 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. Tying this framework into a growth and profitability model helps align all of the metrics that influence the growth of your business – from LTV and retention to sales productivity.
- 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.”
Most importantly, CFOs need to adjust their mindset to one of long-term value creation:
Separate from financial operations, getting board input and alignment during the very early IPO consideration phase is critical for setting yourself up for success. As a former CFO who has led the IPO transition for two companies, David Faugno often advises private company leaders to develop a board communication strategy before establishing the timeline.
Lastly, as CFOs focus on the financial health and growth of the company, their IPO software stack should always be in service to helping identify, track, and improve those KPIs.
2 Years From an IPO
Companies that have moved past the IPO consideration phase and into actual planning and timeline creation will have a busy next 18-24 months.
In a “normal” year, growth and profitability might be more predictable. But in the current climate, the impact of market conditions on business growth is anyone’s guess. In our Cash Management series, we uncovered a lot of tactics and strategies for preserving and re-calibrating spend during uncertainty. These strategies ultimately help CFOs think about the balance between growth and profitability and the supporting metrics to quantify that balance both internally and externally to investors.
For instance, a value metric that is becoming important to investors is the Rule of 40 – the principle that the combined annual growth rate and profit margin of a company should exceed 40%. The Rule of 40 is used as a simple rule of thumb for investors to measure the combination of growth and profitability. Lately, higher revenue multiples have been associated with companies that are stronger on the Rule of 40 calculation.
Alongside financial metrics, an essential part of IPO readiness is having a strong and consistent narrative about your company’s future. Given how the market has shifted, CFOs should now be thinking about how to craft a compelling narrative around growth and the company’s path to profitability.
When it comes to actual IPO readiness, one of the takeaways we heard from nearly every CFO or IPO expert we spoke to was: have a comprehensive IPO checklist. “You want to establish clear checkpoints and deadlines for reaching the key IPO milestones,” said David Faugno. “I’ve found it very useful to create a readiness checklist that can be read out against at board meetings. That way, we can all review the checklist together, track progress against it, and call out any areas of risk.” Steffan Tomlinson added, “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.”
Another key piece of advice we heard is, don’t wait to start building out your IPO team. “If I could do the IPO again with six more months, I would’ve built my FP&A team much sooner rather than waiting,” said Navam. “You need a strong FP&A team to have a solid operating, forecasting, and planning cadence. They have to be operating in very concise periods of time and landing the forecast in a very small range on both revenue and theoretical EPS before you go public.”
12-18 Months From an IPO
If market conditions improve and you suddenly find yourself in a position to take your company public, former Remitly CFO Susanna Morgan offered some advice on how to maximize that compressed timeline:
- Conduct an IPO Assessment: Doing an IPO readiness assessment early (12 months out) is something Susanna strongly recommends, especially for companies that have complex accounting needs. “Remitly is a global regulated business with a high volume of transactions, so there’s a lot of complexity,” she explained. “When you’re in high growth mode, you don’t necessarily anticipate all the work that will be needed on the accounting side of the house.”
- Find a Project Manager: Susanna created a project manager role to run the IPO, which she found incredibly helpful. “That person was responsible for building a project plan and relentlessly tracking against it,” she says. She also hired a leader to focus on SOX compliance – another key area that CFOs shouldn’t underestimate.
- Align With the Board: Board readiness is another key focus area for CFOs in the early IPO phase. Pay particular attention to your three board committees and the Audit Chair specifically. “Filling the Audit Chair role can take longer than expected because you want someone with the right qualifications and financial experience that will also be valuable on an ongoing basis,” said Susanna. “Finding someone with deep experience as a CFO helped us flag some gaps on the accounting side early on in the IPO process.”
Investor relations is another important area to focus on, and engaging investors and sell-side analysts early is a critical unlock we heard from several CFOs. Co-founder of The Blueshirt Group Alex Wellins shared five guiding principles of an IR strategy, which were:
- Make IR an early priority
- Build relationships with the right sell-side analysts
- Underpromise, Overdeliver
- Plan for the long-term
- Bring in external IR support
In the final six month sprint, it’s important to spend a lot of time thinking through what business KPIs you’re tracking internally and planning to share externally. Also, take the time to educate your employees about the impact of the IPO. “We found a lot of confusion around equity and tax consequences, so we started doing options 101 training and educating our teams on how their options and RSUs work. All of that is important for morale and minimizing attrition,” said Susanna.
While we may not have a crystal ball that can determine when IPO market conditions will improve, staying IPO-ready is a critical job of the CFO:
- If you’re 3+ years out, now’s the time to start building the financial and operational muscle to be able to accurately predict growth and profitability.
- If you’re 18-24 months out, start building your IPO team, establishing your growth/profitability narrative, and ensuring the business is in a strong financial position to be public market ready.
- For those anticipating going public in the next 12-18 months, consider starting your IPO readiness assessment, engaging investors and analysts, and thinking through the KPIs you plan to track internally and share externally.