If your company is able to raise debt or equity to keep growing, there's no reason to jump to the public side with an IPO, CFOs and capital raise specialists said at the MIT Sloan CFO virtual summit last week.
The best time to go public, or whether you should go public at all, is unique to your situation. But many companies can get on a sustainable growth path and take advantage of the benefits that come with staying private, the speakers said.
Tipalti, a 10-year-old startup that's been raising private debt and equity annually, is comfortable with its path, its CFO, Sarah Spoja said.
"I think of public equity as just another form of capital raising," she said. "If we can continue as we have and raise private equity and debt in the levels we need, we'll continue to keep doing that."
The company just closed a $150 million capital raise using a virtual process that Spoja said was quicker and, in some ways, more focused than it would have been otherwise.
"Because we were on Zoom, we could spend more time with these [investor] groups, in data rooms and discussions," she said.
She and the management team had never met the lead and secondary investors before, but by the end of the process, they had built a strong relationship and see crossover potential with them should they decide to go public at some point.
Debt and equity options
Tipalti is a cloud-based SaaS payments provider whose business picked up during the pandemic as companies adopted the technology to help them manage through the downturn remotely.
Before the pandemic, the company alternated each year between debt and equity, and 2020 was expected to be a debt year, but the management team opted to go with equity even though debt is lower cost and not dilutive.
"We were getting great options on either side," she said, but they chose equity because they found a small set of investors who would work with them as partners.
The role investors can play as strategic partners is crucial for startups and part of the advantages of private equity that shouldn't be overlooked, said Beth Clymer, CFO of Jobcase, a consumer internet platform helping people manage their work lives.
"You get cash but they also bring you partners that can accelerate your business," she said. "You get strategy input and help with executive hiring and other things."
Clymer, who's managed IPOs of several businesses, says public markets can open you to a much broader field of investors, but you don't get that close working relationship that comes with private partners.
You also face more scrutiny and have to be prepared internally for the stepped-up reporting requirements.
"It's nice to say 95% of the way your business is run is the same whether you're public or private," she said. "But it's a meaningful operational burden. You have to be [Sarbanes-Oxley] compliant, and have forecast accuracy that's good enough to give guidance and stick to it."
You don't want the lack of finance maturity to be the thing that gets in the way of your decision, she said. Strategic considerations are all that should matter.
Whether you stay private or go public, how you valuate your company differs based on your profitability stage.
If you're a profitable company generating a positive cash flow, the valuation regime is well established: you plug earnings multiples and discounted cash flow into your models and generate a valuation, Clymer said. If investors are doing the same thing, there's no reason your valuations shouldn't align closely.
If you're an investment-focused growth company that hasn't yet generated positive cashflow, a characteristic of the typical SaaS technology startup, the calculation isn't that much different, but instead of looking at multiples of earnings, you look at multiples of revenues.
There are more subjective considerations, too: the quality of the management team, valuations from private capital raises, comparisons with similar companies, and performance of the company's unit economics — i.e., its business KPIs like lifetime value to customer acquisition costs (LTV-CAC), churn and its inverse, retention, and sales productivity.
"These unit economics give a hint to where the company is going even if it's still in investment and growth mode," she said.
The KPIs become a key valuation consideration when you go public and include them in your S-1 filing, said J.T. Stephens, a UBS managing director.
"You need to use those unit economics to prove to the buy side you can ultimately achieve profitability and the investments you're making are rational, and, when it gets to a steady state, the business will kick off 15-20% EBITDA margins," he said.
For Keros Therapeutics, which went public earlier this year in the first post-pandemic IPO, the timing was right despite the uncertainty in the market.
"We had the right executive team in place and the biotech market was hot," said the company's CFO, Keith Regnante.
The company, which is testing treatments for hematologic and musculoskeletal disorders, was valued at $1.5 billion and it quickly followed up with a $150 million capital raise.
Even with its success, Regnante said, going public isn't something you should rush into.
"It's fun to go public," he said. "It's great to look on Yahoo! Finance and see your ticker on an hourly basis, but there are benefits to staying private. It keeps you under the radar screen. You can stay in stealth mode as you build your value story."
One IPO method gaining popularity is the use of a special purpose acquisition company (SPAC), a blank-check company that's launched with the intent to merge with or acquire a company that's ready to go public. Going this route tends to be faster, cheaper, and more private.
"If your company has been targeted by a SPAC, the process remains confidential," said Stephens. "You can negotiate the valuation [without] exposure during the process."
Higher-quality investors are involved in SPACs now, too, he said. Some of the biggest names in long-only investment firms are using the process more now.
"Titans of finance are wanting to do these," he said.