The rise in initial public offerings this year, despite the pandemic, speaks to finance leaders' recognition that public markets remain the best way to raise capital, build organizational discipline, market your offerings, and give your company presence, YEXT CFO Steve Cakebread said in a CFO Thought Leader Podcast.
Cakebread is a veteran of some of the biggest tech IPOs in the past decade, including for Salesforce and Pandora, and says the rise of alternative ways to go public — including through direct listings and the use of special purpose acquisition companies (SPACs) — is an important trend.
He also says a renewed interest in public companies by retail investors is a positive sign. "Whether it's through a Robinhood or some other vehicle besides a traditional investment institution, [people are] starting to recognize the public market is a way to create wealth," he said.
Drop in IPOs
Although there have been 303 IPOs so far this year — 70% more than by the third quarter of last year — the long-term trend has not been good for public markets.
There are half as many publicly listed companies today as 10 years ago, as companies opt for private money in part to avoid the intense scrutiny and cost accompanying an IPO. Private equity now accounts for about 70% of capital raises.
Encouraging more companies to go public has been on the Securities and Exchange Commission's radar for some time. Last week, SEC commissioners at a conference discussed ways to boost IPOs, including by easing companies' regulatory burden. Commissioners disagreed on whether that was a good idea.
The discipline of preparing one's company for an IPO is part of the benefit, said Cakebread, who took search-control company Yext public in 2017. The process forces you to put in place systems and a governance structure that can withstand scrutiny.
"Why would you start a business if you don't want to make it run effectively anyway?" he said. "The governance requirements aren't honestly any different than if you're going to run an effective small business or private company that wants to get big."
One exception is if you're just interested in creating a product with the intention of selling it to another company. In that case, you wouldn't hire a lot of people or promise your employees much opportunity going forward.
For companies hoping to go public, timing is everything. The $1 billion-mark is considered the magic number, but you must think about preparing for it once you get to between $50 million and $200 million in revenue, said Cakebread, who's about to release a book on the topic, The IPO Playbook.
Between $50 million and $200 million is when you start putting in place the right systems and the right people, starting with the CFO.
"The people that can start companies and get them to a size that they can consider going public are not necessarily the people that can take you there," he said. "It doesn't mean it doesn't happen, but it's rare; most boards, most bankers, want a more professional, more outspoken CFO, one who's more sophisticated in terms of governance. That's typically not someone you hire in early-stage businesses."
The outside counsel is the other crucial person. "A lot of this is placed on governance," he said. "It's not that hard. But you need to know what to do. So, the CFO and outside counsel are generally the two good indicators you're [thinking] about going public."
Getting systems up to speed, another key step, can be expensive, especially if you're still in the $50 million revenue range, but it makes more sense in the long-run to get your technology in place early.
"It's much cheaper to put them in when you're starting and get your teams used to them than when you get to $100 million to $200 million," he said. "You'll spend 10 times refreshing your systems at that size."
CFO as communicator
For the IPO roadshow and afterwards, investors and analysts consider the CFO one of the company's storytellers, along with the CEO.
"You learn speaking skills, which is good for all of us," he said. "You learn how to answer questions and explain your story. None of that is hard; it just takes a little bit of work. But it shouldn't prevent you from going public."
Answering questions from investors is time-consuming and can be daunting, but there are firms that specialize in investor relations you can tap to help you.
"There are people I've worked with my whole career, even after we've been public for five or 10 years," he said. "I still use these same investor relations people to bounce ideas off of, look at my problems differently and how to communicate."
The investment banker you work with is also one of your important team members in terms of storytelling, at least until the IPO. After that, the person's day-to-day involvement drops until you go out with another capital raise. That person, Cakebread said, "can help you write the story of the S1" — the initial registration you file with the SEC.
Many are tempted to choose an investment banker from one of the big Wall Street firms, but that's not necessarily the best choice, Cakebread says. It's better to find bankers who have followed your company and understand its story, because they're the ones who can see past a bad quarter or problem metric to keep their eye on the big-picture strength of the company.
"If you get sell-side researchers that understand the underlying story, those are the banks you want to take public with, not the spreadsheet junkies," he said.
You shouldn't have to worry too much they won't bring the same expertise as one of the big banks to the technical aspects of your IPO, because that process is highly regulated. Banks of all sizes must manage the process and set their fees the same way.
"Differentiate on the sell-side researcher that really understands where you're trying to go," he said. "That's the top criterion."