Got IPO Fever? Why It’s Not an Exit Strategy and How You Should Prepare for It
April 24, 2012
When I hear entrepreneurs suggest that their companies’ exit strategy is an IPO, I can’t help but cringe. Why? Because an IPO is not an exit. It’s a funding event.
Unfortunately, too many startup and expansion-stage management teams don’t see it that way. They get IPO fever as they build toward their supposed “exit,” fostering a finish line mentality that encourages short-term thinking. In reality, an IPO is simply a new beginning and there’s never a more important time for a business to encourage long-term focus and planning than when it begins building toward an IPO.
Now that I’ve gotten that off of my chest, let’s talk about what it actually takes to prepare for an IPO and what companies should expect after they achieve it.
In one sense, an IPO can be a great cultural event that sparks incredible energy and passion among a company’s ranks. On the other hand, it can also be a gateway to higher risk and a harder fall if it distracts a company from the things that made it successful in the first place: hard work, smart execution, top-notch customer service, superb product development, and a crystal clear vision.
The solution for avoiding that fate is simple, really: Treat the 12 quarters before and after an IPO exactly the same. In other words, run your business as usual, continue to drive organic growth, and if an IPO happens, that’s great. If it doesn’t, you’re still in great shape.
Here are three tips that should help your business simultaneously prepare for an IPO, continue its natural growth trajectory, and maintain its company-wide focus on the things that really matter:
1. Don’t juice quarters or smooth spending pre-IPO.
Tempting as it might be, your goal shouldn’t be to make the company look stronger or more fiscally conservative than it actually is. That will only hurt the company and its investors after an IPO. If the revenue numbers or cash flow you reported before aren’t sustainable and you belly flop in the first quarter after going public, you’ll have egg on your face and find yourself locked up financially.
2. Draw up a financial plan for the two to three years after an IPO.
Too many companies focus on following a sound financial plan as they ramp up to an IPO, forgetting that they also need to plan for the years after it. The truth is that expectations only rise after an IPO, and if you don’t have a plan in place to meet or beat them you’ll have a whole bunch of angry investors pounding down your door. That’s why it’s critical to create a financial plan in the year leading up to going public that serves as a roadmap for the two or three years post-IPO.
3. Act like a public company before you actually become one.
For the three quarters before an IPO, run the business like you’ve already gone public. For example, execute with a post-IPO management cadence, establish codes of conduct, and forecast the next quarter like you’ll have to provide data in earnings calls. If you can’t do those things before going public, then you’re in for a rude awakening after an IPO.
There are, of course, many more preparatory steps that go into getting a company ready for an IPO. But the points above should help you keep everyone focused on both the short- and long-term goals of going public.
Ultimately, your pre-IPO goal should be to prove to yourself (and to investors, for that matter), that your business has the ability to continue growing beyond an IPO. If you can’t do that, all of the excitement and energy of your big moment will crash and burn when reality sets in. And no entrepreneur wants to experience that kind of exit.
Phil Fernandez is a 26-year veteran of Silicon Valley and has the scars (and a couple of successful IPOs) to prove it. He currently serves as the founder and CEO of Marketo, a B2B marketing automation platform, and is the former president and COO of Epiphany, a public enterprise software company. Fernandez is also the author of the forthcoming book, Revenue Disruption, which he calls a manifesto for revenue performance and growth. The book will be available nationwide on May 1, 2012.