Deciding when and how to take a private company public is one of the biggest decisions a founder and CEO, his or her leadership team and board will make.
And once the decision is made, there’s plenty of work to be done to make the initial public offering a success.
I’ve reflected a lot since the IPO, and there were some invaluable things I learned during the process that I’ll share in a four-part series over the next few weeks. First, I’ll cover making the decision to go public, the timing and the team you need in place. In following posts, I’ll discuss how to have a successful roadshow and day-of celebration, as well what comes post-IPO. It’s all to help as you and your company consider your own path to IPO and beyond.
Why go public? Why not stay private?
I’m asked all the time how we decided to take Pluralsight public. The answer varies from company to company. For some, they’re no longer able to raise money from private investors. Others have strategic reasons or want to provide flexibility and liquidity to their early investors and employees. Some just want to IPO for the sake of it.
Whatever your reasons, the important thing is to get clear on the “why” from the start. That clarity will guide the many subsequent decisions you’ll have to make along the way.
For Pluralsight, we went public primarily to increase our brand awareness across our core markets. We generate over $200M in annual billings, have historically been cash flow positive, and we have a fantastic financial backer that has demonstrated their willingness to provide more capital when needed, so we didn’t need to raise money. Liquidity to early investors and employees is nice but not something we felt was urgent. On the other hand, the transparency that comes with going public almost instantly boosted our credibility with large, multinational enterprise companies, which has been a big reason for our recent growth and is central to our future strategy. As a strong side benefit, we laid a strong foundation for our mission to democratize technology skills by improving our ability to scale operations for years to come and increase our global reach.
Once you decide if it’s right for you, the next big question is “when?”
How do you know when the time is right?
Near the end of 2016, our senior leadership team and board got together to define the criteria for making the decision on when to go public. We identified clear milestones we’d need to achieve for all of us to have confidence in pursuing the public path. We agreed that we wouldn’t spend a lot of time talking about going public until we had reached those milestones, which provided a lot of clarity for the entire group.
We walked out of the meeting with an agreement around the following milestones that would open the door for making the decision:
· Multiple quarters of growth above a certain threshold
· Confidence in future growth for a specific number of quarters
· Strong cash-flow levels above a certain threshold
· Various compliance checkboxes completed
Agreeing on these milestones removed any ambiguity or debate about taking the company public before we were ready. The board wouldn’t push for it, and neither would management.
That agreement (and the ramp-up time it afforded us) helped us set our compass and organize our priorities and efforts. It also made it easy for us to find the right moment to move forward after regular check-ins on our progress and a strong year for the company overall. We made the decision to file confidentially at the end of 2017 after we saw a full year of results.
Commit to the process
Once you’ve decided to set out on your IPO journey, there are a number of big decisions you need to make. It’s important to get clear on the preparation and process that lies ahead, identify the bankers and other partners you’ll work with, define how you think about price and valuation, and decide the size of the offering. Ultimately, you need to know what you want out of the IPO.
Getting clear on our intentions helped us lay out a long-term plan, and as a bonus, made the entire voyage less stressful.
As an example, we decided early on that we wanted to sell 15 percent of the company through our IPO. We were aiming to be free cash flow positive quickly while driving growth in our business. Because we didn’t need to raise vast amounts of money to drive our strategy, we had the freedom to fix the dilution by capping the number of shares we’d sell, which we believe helped our pricing and smoothed out the process along the way. We no longer had to debate the number of shares. The only remaining question was the price per share, which would ultimately determine our offering’s total dollar amount. We got clear with our bankers on what we believed would be the right initial price range and what milestones we’d want to see before raising it. As a result, we didn’t spend countless hours debating points like these throughout the process.
Your reasons might be different — you may need to raise capital, fund growth or maximize cash. Whatever they are, hold a candle up to the light — make sure you’re clear on what you want to achieve and create alignment with your bankers.
With this clarity in place, we moved forward in late 2017, connecting with our lead banker well in advance of our intended IPO date to get the ball rolling. We decided to keep the potential filing confidential for as long as possible to streamline the S-1 process, give us opportunity to give a go/no-go call as was warranted, and protect our preparation efforts.
Get the right team and partners in place
The amount of work that comes with an IPO is overwhelming but having the right internal team and external partners in place makes uncharted waters seem chartered.
Internally, if the CEO doesn’t have public company experience, you’d be wise to ensure you have that experience in your CFO and legal team, which was our situation. If the CEO does have public company experience, the requirements on the team might look different. It’s also helpful to have public company experience in key roles on your management team plus external advisors and coaches to help you along the way.
Most companies choose to do a bake-off with bankers, hearing pitches from multiple banks on what they offer and why they’re right for your business. Because we filed confidentially, we skipped this process in order to maintain privacy and increase efficiency. Instead, we chose our lead banker early, selecting Morgan Stanley because we had built a strong relationship with them over several years and they knew our business best. It wasn’t until later, after we had already drafted the S-1, that we selected the rest of our banking syndicate.
On the legal side, choose a firm that has deep experience working on IPOs. We selected WSGR because of their experience with and ability to navigate the complicated world that is the SEC.
Doing it this way may not be right for your company, but choosing our lead banker and legal counsel early in the journey made it possible for us to streamline the entire IPO process. Ultimately, you’ll know you have the right team in place if you experience things going smoothly.
Drafting and filing your S-1
Even with the right teams in place, there’s no question about it — completing the S-1 is a heavy lift, and the process takes months with numerous back-and-forths with the SEC. But when you place trust in your legal and financial teams, it will be easier.
This hundreds-pages-long document is a monumental effort, essentially like writing a book on the company. Not only do you have to accurately describe your business (financial statements, value proposition, competitive strengths and future plans for growth, to name a few), you also have to provide risk factors. These are reasons why it could go wrong for investors. It means picking apart your business, which is always hard to do.
Preparing the S-1 involves a tremendous amount of data gathering and quarters of audits to make sure the numbers are air tight. It requires the collaborative efforts of your finance, legal, investor relations, product, marketing and communications leaders, and has to be reviewed and approved by the SEC before you go public.
It’s important to get the S-1 right because it lays the foundation for the story you’ll tell in your roadshow video and presentations with investors. These meetings are your shot to tell your company story effectively, and they require a lot of practice and preparation, which I’ll dive into in my next post.
Taking a company public is like nothing I’ve ever experienced. There are a lot of moving parts and competing priorities. Getting clear on how you’ll make key decisions, staying aligned to your goals and partnering with the right people will make the journey a successful one.
Watch for the next post in the Inside the IPO series, where we’ll take a deep dive into the roadshow process and how to tell your company story effectively to investors.