As the trend to stay private longer has become pervasive, with easy access to cross-over investors and inexpensive debt, many of the companies poised to go public this year have big cap tables and long-established relationships with Wall Street.
We often hear executives at pre-IPO companies — even those who have never served in the C-suite at a public company — say they’re not worried about investor relations. They are comfortable with their long-held relationships with early-stage investors and may have a quarterly reporting cadence in place.
Such companies are certainly a step closer to public readiness than most pre-IPO contenders, but they tend to underestimate how much time and focus being public requires. After all, in these times of heady private-company hyper-growth, many investors are just happy to be in early and along for the ride.
As such, these investors may not be asking the tough questions. But they will be soon enough. The truth is, once a company is public its relationship with the Street changes drastically. For better or worse, Wall Street is driven by quarterly earnings and daily news; this velocity changes everything about communications.
We tell our pre-IPO clients to start preparing for being public at the same time as they begin preparing for going public. What’s the difference? A few things to consider:
Take the Long View
Companies that decide early on what key performance indicators they will and won’t give, what expectations they have around valuation, and how to manage analyst expectations simply do better in the long term.
In an analysis we did for a mega-IPO company that was debating whether to go public, we found that mega-IPOs stock trended up for day one, week one, and month one. But stock prices diverged at year one — ostensibly because the long-term thinking required to scale wasn’t in place in the companies that saw stock declines.
It’s a key part of the investor relations function to think ahead in terms of setting financial expectations. It should also be a part of the company DNA. If you have decided profitability isn’t a goal, figure out how to tell that story. If you know you may spend big on acquisitions to gain market leadership, let investors know.
Net net, you must have a clear vision of the future and communicate it internally and externally from the start of public-company life.
Being Public Is Harder Than It’s Ever Been
With news traveling digitally and virally; increased pressure from activists; the growing focus on environmental, social, and governance investing; and the increasing role of government regulation, the spotlight on newly minted public companies has never been brighter.
While most companies thrive in the public markets long-term, every public company will eventually face a crisis. Whether it’s missed numbers or legal issues, it’s crucial to prepare a crisis communications protocol across the company and be ready to act on it, quickly.
This means training spokespeople and briefing a cross-functional team from public relations, HR, legal, and investor relations. Where activity in a private company can be siloed, public-company life requires that the team be in lock-step and prepared to uniformly address their constituents when bad things happen.
And, being a public company means bad news is more than a media problem; it’s also a stock problem. The implications of a falling stock price are ominous and far-reaching — from employee morale, to shareholder activism, to regulatory enforcement, to brand and reputational risk.
Remember the Rule of 72, and Plan for Success
One of the biggest surprises a company faces after an IPO is the level of resources needed to support the compliance efforts of being public.
When a company is growing fast, it’s easy to overlook the infrastructure it will need to put in place in a year, two years, and five years down the road. This infrastructure — from people to systems to processes — is often long-lead and much harder to put in place as a public company.
It can also become the mundane reason a company misses its numbers and stumbles in the marketplace. The obvious pre-IPO needs in finance are investor relations and SEC reporting. Less obvious, and almost always understaffed, is a robust FP&A team that can support the rigorous forecasting needs of a scaling public company.
Of course, it’s not just finance that is impacted. Every department from legal to HR to engineering will have new compliance requirements and scrutiny. It is important to understand and prepare for this new reality.
In order to gracefully scale this transition, finance must play a strategic role. While finance is often a tactical function in a private company, as an imperative to success it must become a strategic function in the public markets.
Set and Widely Communicate Your Moral Compass
The most successful companies we work with balance a commitment to meeting investor expectations with a focus on the customer. That means they spend time with investors communicating their vision, strategy, and numbers.
It also means they educate their employees on the numbers and incent them accordingly. It doesn’t mean they’ll sacrifice their integrity to meet quarterly expectations. Communicating the importance of the Street to the entire company while underscoring that a company must be customer-centric and long-term focused is a balancing act, but one that changes the game.
It’s key to have a clear set of directives that employees can rally around to drive the business. Companies that are proactive in communicating the puts and takes of their business to Wall Street have less-volatile stock prices and a better relationship with investors.
Going public is a huge accomplishment. Being public is a huge commitment. We’re excited to see how the unicorns perform when the inevitable storms of being public converge.