IVP is a later-stage venture capital firm with $8.7B of cumulative committed capital. We’ve invested in over 400 companies, of which 122 have gone public, including seven so far in 2021. We are experts in helping our companies transition to the public markets and recently strengthened our team with the addition of Ajay Vashee, who was most recently the CFO at Dropbox (NASDAQ: DBX), where he led the company’s IPO in 2018. There has never been a better time to consider a public listing, given the strong demand for technology public offerings, and there are now several paths that companies can take to access the public markets: a traditional IPO, direct listing, and SPAC combination. We recently hosted a panel moderated by Ajay that featured the CFOs of three IVP portfolio companies — Coinbase (NASDAQ: COIN), CrowdStrike (NASDAQ: CRWD), and Hims & Hers (NYSE: HIMS). Each CFO took a different path to enter the public markets, and we were fortunate to hear their first-hand accounts. During that event, we discussed navigating the public markets in the midst of a pandemic, managing readiness efforts, and evaluating the trade-offs between the three paths to going public. Our event was hosted on Hopin and if you missed it, you can watch a recording here.
We wrote this blog post to help demystify why companies go public, how companies go public, and what to consider when deciding on a path to the public markets. In it, we’ve synthesized the key learnings from our event, and also highlighted the tradeoffs between each of the three paths to going public. If you are a CEO, COO, CFO, finance executive, or just someone who is interested in how companies transition to the public markets, this content is for you. Let’s dive in!
WHAT DOES IT MEAN TO “GO PUBLIC”?
Why do companies want to go public?
Going public is an important milestone for founders, employees, and investors. When a private company “goes public,” it begins trading on a public stock exchange (e.g. Nasdaq, NYSE) and the public is able to freely buy and sell shares of the company. There are many reasons why a company may want to go public, but the primary reasons are as follows:
- Access to capital
- Liquidity for investors and employees
- Currency for making acquisitions
- Marketing / branding event
Going public allows your company to tap into significantly larger pools of capital that can help finance continued growth, international expansion, and acquisitions. Being publicly traded makes your company’s stock liquid and gives founders, employees, and investors an opportunity to sell their shares to the public. Being a publicly traded company also makes it easier to use equity to finance acquisitions because the underlying shares are fully liquid and can be sold for cash at any time. It can also make your company’s equity compensation feel more “real” to prospective employees and can make it easier to attract top talent.
“We were able to raise a convert about a month after going public, which then satisfied our need for capital at a very low cost of capital. Once you are public, you just have so many more structures and so many more options for capital.” – Alesia Haas (CFO, COIN)
Going public is also an important marketing event that can help draw attention to your company and serves as a stamp of approval from public market investors. The process of going public is arduous, and typically only well-run businesses with strong controls and business fundamentals are able to make the leap. Public companies are viewed as less risky than private companies, which can make it easier to do business with larger corporations. Going public is a powerful opportunity to tell your story to the world and elevate your company’s profile.
“A big reason [to go public] was around brand awareness. Back in the day there were a lot of big competitors who had done well in cybersecurity but we thought that we had a different approach to cybersecurity, one that we felt would be much more effective. So, branding was huge. We were not known in all four parts of the globe so we were trying to bring out that awareness.” – Burt Podbere (CFO, CRWD)
What are the drawbacks of going public?
Going public creates extensive reporting requirements where companies must disclose financial results, executive compensation, and material updates to the general public. This means that your competition and customers will see your financials regularly, making it much harder to operate in stealth. Public companies file 10-K/10-Q’s every quarter and host quarterly earnings calls where discerning research analysts and investors dissect the business in detail. Public companies also face more intense scrutiny from the media, regulators, and investors, and must take extra precautions in regard to compliance and managing MNPI (material non-public information).
We’d also note that most employees at technology startups are accustomed to seeing their company’s valuation increase in each subsequent financing round. As a public company, your stock is freely traded, which can make the inevitable ups and downs of your company’s stock price a major distraction for employees. Being publicly traded can also make companies more short-term oriented because of the focus on “hitting the quarter.” That said, we strongly believe that the benefits of going public far outweigh the drawbacks. Going public is an important milestone in any company’s journey and is a forcing function that levels up a company’s management team, internal processes, and financial controls.
Preparing for a public listing can take 12 months or longer. Prior to going public, many internal processes will need to be buttoned up and your company will need a deep leadership team across all key functions. You will need to predictably forecast revenues and expenses, and also have several years of audited financial statements ready to share with the SEC to file your S-1. If you qualify as an “emerging growth company” (i.e. a company with <$1B of revenue), you will only need two years of audited financials, though many companies still choose to include three years of audited financials. Finding great advisors and consultants that can help with technical accounting, SOX compliance, tax, and other financial matters is a great way for companies to get additional support as they prepare to go public.
“The org structure I designed included a Head of FP&A, Head of Accounting, and Head of Wall Street and Strategic Finance, so that I had all three bases covered.” – Burt Podbere (CFO, CRWD)
Within 90 days of an IPO, the majority of board members must be independent, and the audit, compensation, and nominating/governance committees must all be established, also with a majority of independent directors. Board diversity is also a major consideration for companies as they prepare to go public. If your company is headquartered in California, there are laws in place that require public boards to have at least one board member from an underrepresented community by 2021, and two or three by the end of 2022, depending on the size of the board. We expect the push for increased board diversity to continue, and believe that it is a positive development for the entire ecosystem.
Public companies don’t achieve internal readiness overnight, and it takes years of hard work to be public market ready. The best companies “behave” like public companies well in advance of a public listing, so developing good hygiene early on pays off. Prior to going public, it’s helpful to run mock earnings calls with investors on your cap table and continue to refine your forecasting muscle. The late-stage and crossover investors on your cap table can be uniquely helpful in this process. As your company gets closer to going public, your finance team should closely monitor how accurately they can forecast the upcoming quarter and fiscal year, and fine tune their forecasting methodologies accordingly.
“At Dropbox, I stepped into the CFO role about a year before we got on file with the SEC to go public. For me, my initial priority was hiring a strong and experienced team around me. I hired a Chief Accounting Officer, VP FP&A, and VP Corporate Finance and Strategy; each had worked through the IPO process multiple times. We also kicked off an ERP transition from NetSuite onto Oracle Fusion. We spent a lot of time refining our forecasting muscle by running mock earnings calls with crossover investors on our cap table.” – Ajay Vashee (Former CFO, DBX)
Life as a Public Company
Life as a public company is very different from life as a private company. One of the biggest changes is that the flow of information throughout the company suddenly becomes more restricted in order to prevent uncontrolled disclosure of material non-public information. If you are a CEO that freely shares board decks with the entire company or hosts transparent weekly all-hands meetings, those typically need to be pulled back or reworked after you are public. It’s also common to see a lot of early employees leave to start their own companies or join earlier stage companies as their equity becomes fully vested. This is to be expected but can be a drag on morale for existing employees.
“We had a culture of a lot of transparency and sharing metrics, and we really had to pull back our access to data and educate the employees on what MNPI is and why it’s harmful. That has been a big cultural change for us regarding who has access to data and what people can talk about.” – Alesia Haas (CFO, COIN)
To meet the expectations of public market investors, public companies also need to get into a cadence of “beat and raise” – performing better than investor expectations in a given quarter, and raising guidance beyond investor expectations for future quarters. This means that your finance team needs to be able to accurately forecast revenues and expenses, and have a strong grasp on the different levers of the business.
Moreover, investor relations typically becomes a much bigger time commitment as a public company. As a private company, the CFO is typically responsible for updating a small handful of VCs every few months. As a public company, the CFO must spend significant time with existing investors and potential new investors, and manage the sell-side research analyst community. For a public company CFO, having the right team in place that can provide leverage to enable you to effectively manage your responsibilities is critical.
“I’d say the biggest change definitely from a time and responsibility standpoint has been on the IR side: going from updating a handful of VCs once every three months to talking to buy-side folks, existing investors, potential investors and keeping up with the sell-side.” – Spencer Lee (CFO, HIMS)
THE THREE PATHS TO GOING PUBLIC
Companies can now access the public markets through a traditional IPO, direct listing, or a SPAC. Before deciding which path to follow, it’s important for the management team to discuss goals and expectations. Are you optimizing for speed, control, capital, or dilution? How much control are you willing to give up? There are many tradeoffs between each of the three paths, so it’s important for the management team and board to align on key objectives.
“My best advice is that you really need to align on your first principles. Why are you going public? What are the goals? Make sure that everyone is very clear on what those are before you make the decision on the structure of how you go public.” – Alesia Haas (CFO, COIN)
The traditional IPO has historically been the most common path to the public markets, but there’s been a significant increase in the number of SPACs in 2020 and into Q1’21. Direct listing activity has also picked up, and we expect many more companies to consider this path in the future. See below for data on new public market listings in recent years.