Regardless of market conditions, IPO prep looks the same from a financial perspective. The additional scrutiny that tech companies undergo to enter (and stay in) public markets is intense, requiring a significant amount of preparation most startup finance teams aren’t used to.
“Plans are useless,” said Lister. “Planning is everything.”
In a webinar presented by Sage Intacct, Michael Lister, Leader, InsightsOfficer, at PwC, and David Appel, Head of Software and SaaS at Sage Intacct, shared the seven steps startup finance teams need to take when preparing to go public.
1. Get ready to be predictable
Post-IPO, a large part of a CEO’s job is engaging with investors and showing you know your business and its numbers. You can’t slip up in these communications or on compliance with regulations and filings.
Appel describes IPO as the “big leagues” of the business world, which means the game has different rules. Not only will you need a consistent story backed up by numbers, but you’ll also have to guard your reputation against any perceived impropriety or compliance slip-ups.
2. Your job is now (financial) modelling
According to Lister, the best public companies need to close their books within 3-5 days of each cycle’s end. In private companies, the closing could easily take weeks because they don’t have the same reporting obligations or public pressure.
To ensure you are ready for the scrutiny, Lister recommends both scenario and contingency planning, providing a five-step framework for founders: identify key uncertainties or risks to your business, bucket those risks into different scenarios, develop your response strategy if any risk comes to pass, look for trigger points to remediate or avoid before they become issues, and continually revisit and update the plan as new information comes in.
“Ultimately, when you’re going through at month end, you’ve got to have the people and processes in place to get things done very, very quickly,” Lister said.
3. Prepare to be scrutinized
If you thought venture capital diligence was difficult, just wait until you have a deluge of analysts and earnings calls to handle.
“As much scrutiny as you’ve had doing fundraising—oof—get ready for public markets and then the IPO process itself,” Appel said.
To get ready for IPO, Lister added your company needs processes, controls, staff, and systems to get all the books in order. This helps with closing your books quickly, keeping audit trails, and ensuring you have specialized staff members on hand to meet the future requirements of a public company. To maintain your defence against scrutiny post-IPO, Lister noted that fast financial reporting, compliance controls, financial modelling, and data visibility all need to be ready for day one.
4. Set up your internal controls
Lister identified four internal controls that are critical to success with an IPO:
Approvals: documented processes for activities and transactions.
Custom workflows: a configurable system that helps you manage compliance requirements and report on them quickly.
Audit trails: a way to demonstrate that no one individual has control over all parts of a transaction. Lister said this is particularly important since “auditors will want to see who did what, and it’s got to be reliable.”
Leading technology: Lister noted that businesses need a consistent way to recognize revenue that makes sense for their operations that incorporates both SOX 302 compliance (financial reporting responsibility) and SOX 404 compliance (management assessment of internal controls).
“Your shareholders are relying on your business to be good stewards of your funds,” said Lister.
5. Beef up your finance team
Pre-IPO, your finance team can be lean. But post-IPO, your startup needs a proper finance team infrastructure with specialists for each function or compliance task.
Presenting an example, Lister said a typical Pre-IPO team might have accounting and finance operations under the CFO. A public company, on the other hand, will need accounting, operations, SOX compliance members, and other specialized team members like financial planning and analysis (FP&A).
“Well-functioning public companies have a finance and accounting mindset in all areas of their business,” Appel added.
6. Get good at planning, but ignore your plans
Post-IPO, startups have to maintain a delicate balance when it comes to planning: plans need to inspire investor confidence for the future while serving the business in the near-term. Because of this duality, Lister said planning is an exercise and skill set required by all public company leaders. But he also noted that most plans fail or change well before they come to fruition, so the act of planning does not necessarily mean you will follow every step of the plan.
“Plans are useless,” said Lister. “Planning is everything.”
7. Accept tax complexity as a reality of life
When you run a public company, both your earnings and operations become public knowledge. As a result, public company leaders need to accept tax complexity as a part of life, especially if the IPO helps the company expand into new geographies or jurisdictions with different tax laws.
Lister added there are ways to structure your startup’s IPO in tax-advantaged ways, so the complexity opens up opportunities as much as it causes nuisance. But it’s still something that Lister said many private company leaders don’t always have a plan for.
“It’s something you can’t take lightly,” said Lister.
Preparing for an IPO boils down to knowing your business numbers inside and out. A lot of this prep work will feel useless because you can’t use it to make decisions (i.e. financial reporting for compliance is different than strategic financial reporting for insight generation in many cases). This, however, is the burden of the beast. Running a public company means many people’s full-time jobs will be focused exclusively on the operational and compliance considerations required by being publicly traded, which is a different approach from how private companies, particularly lean startups, prefer to operate.
As a leader, your job is to understand that this complexity is all necessary, yet not let it bog you down from what you should focus on: serving customers, employees, and growth.
“This is one of the most, if not the most important decision that your business can make going forward is going public,” said Lister.
Photo courtesy of Pixabay.