Startup IPO: Preparing for the Public Markets

The Recent Surge in Tech IPOs

The past four quarters have witnessed a significant increase in technology companies going public. Looking back to the fourth quarter of 2020, numerous tech companies launched onto the public market with considerable fanfare.

Airbnb demonstrated a strong recovery from the challenges presented by COVID-19 before its initial public offering. Roblox, initially postponing its IPO, ultimately opted for a direct listing. DoorDash also successfully entered the public market, and C3.ai experienced a notable offering towards the end of the year.

Continued Momentum into 2021

This trend has largely persisted throughout 2021, with IPOs occurring in both the first and second quarters. Freshworks and Toast debuted, and more recently, GitLab, Rent the Runway, and NerdWallet have filed for initial public offerings, among others.

The IPO Aspiration and Timeline

While many startup founders aim for an IPO, the typical timeframe for achieving this liquidity event has extended due to the increased flow of capital into the private tech sector. However, preparing a company for an IPO is often not a central topic of discussion in early-stage startup conversations.

It’s a future consideration, much like discussing a 21st birthday with a middle school student. It’s an event that may occur eventually, but it isn’t usually an immediate priority.

The Importance of Early Preparation

Despite this perception, the process of preparing for an IPO can be quite lengthy when executed effectively. Startups may need to begin preparing their operations for the public markets sooner than anticipated.

This subject was explored during TechCrunch Disrupt 2021, featuring a discussion I moderated with Lux Capital Partner Deena Shakir, Madrona Managing Director Hope Cochran, and CrowdStrike CFO Burt Podbere.

Key Takeaways from the Discussion

The complete discussion is available below. For those who prefer reading, I’ve highlighted several key insights from the conversation. The video is provided at the end for your convenience.

The following sections are organized by topic, allowing for easy access to the information presented.

The Timing of IPO Preparation for Startups

Prior to a recent discussion, it was anticipated that several financial experts would advocate for startups beginning their Initial Public Offering (IPO) preparation process as early as possible. However, this expectation proved inaccurate.

Cochran offered his perspective in response to a direct inquiry regarding the optimal timeframe for a startup to initiate IPO readiness activities.

Further insight into the balance between operational flexibility and structured processes was provided by Podbere. This offers additional context for those interested in a more detailed understanding of the topic.

Interestingly, Cochran playfully echoed a previous remark made by the speaker, using the term “loosey-goosey.” It’s noteworthy that this phrase is rarely used by the former CFO, and is reportedly discouraged within accounting professions dating back to 1284.

Source: https://www.youtube.com/watch?v=o-5rg-ckYnU

Key Takeaways

• The consensus suggests that startups shouldn't necessarily begin IPO preparation prematurely.
• A balance between maintaining operational agility and establishing necessary processes is crucial.
• The discussion highlighted an amusing linguistic observation regarding the use of informal language by a seasoned financial professional.

The Impact of SPACs on Startup IPO Timelines

With a significant increase in tech startups becoming publicly listed through SPACs (special purpose acquisition companies) this year, the question arises: does this trend necessitate an earlier start to IPO preparation?

Shakir reinforced Cochran’s point regarding the potential drawbacks of premature preparation, even when considering a SPAC. Initiating preparations too soon could potentially “constrain the expansion of your business – the very factor that will render you a desirable public entity in the future.” Therefore, a delicate equilibrium must be maintained.

What practical steps should startups take? Cochran offered specific guidance: “I would advise all my portfolio companies, starting around the Series B funding stage, to undergo a financial audit.”

This audit process may represent the initial, crucial step towards IPO readiness. While challenging, a thorough audit can reveal underlying issues and potential weaknesses within the company’s financial structure.

Identifying and addressing these issues proactively is vital, regardless of the chosen IPO route – whether it's a direct listing, a traditional IPO, or utilizing a SPAC to enter the public market.

Key Considerations for Early Preparation

• Financial Audits: Begin audited financials as early as Series B funding.
• Growth vs. Readiness: Balance IPO preparation with continued company growth.
• Proactive Issue Identification: Use audits to uncover and resolve potential problems.

Successfully navigating the transition to a public company requires careful planning and execution. Early financial scrutiny can significantly improve a startup’s chances of a smooth and successful IPO, irrespective of the method employed.

Developing a Pre-IPO Checklist

Following our discussion of the textual aspects of the process, Podbere highlights the steps a Chief Executive Officer should consider after consulting with legal counsel and financial advisors.

While extensive preparation is required for an initial public offering (IPO), proactive effort is preferable to submitting a flawed filing and subsequently being forced to withdraw it.

It is significantly more advantageous to thoroughly prepare and address potential issues beforehand.

Key Considerations for CEOs

A comprehensive checklist is crucial for navigating the complexities of going public.

This checklist should be developed in close collaboration with both the company’s legal team and accounting professionals.

Proactive preparation minimizes the risk of costly errors and delays during the IPO process.

• Legal Review: Ensure all legal documentation is accurate and compliant.
• Financial Audit: Complete a thorough audit of financial statements.
• Internal Controls: Strengthen internal controls to meet public company standards.

Addressing these areas upfront will contribute to a smoother and more successful IPO.