The road to the public markets is long — and it may be getting even longer. Increasingly, investors want to meet with private companies well before their initial public offering (IPO). This gives them ample opportunity to develop relationships with the management team and board, understand the business and overall sector, and track the company’s growth.
With that in mind, if your company wants to eventually pursue an IPO, when should your management start meeting with investors, and what should they be prepared to discuss?
We recently explored this topic at the IPO Edge Bootcamp at Nasdaq with three experts at leading wealth management companies: Matt Walsh, Equity Capital Markets at Corbets Capital; Phillip Shefter, Senior Portfolio Manager and Head of Equity Capital Markets at Norges Bank; and Prema Chaudhary, Originator, Corporate Access at Norges Bank. Here’s the advice they had for companies that are considering an IPO and how they should approach investor engagement prior to that process.
Solidify Your Why
While going public may simply seem like a logical next step for a growing private company, there should be more to it than that. Investors will want to know what’s driving that decision for your company.
“Is it going to help the growth of your business? Do you have shareholders? Do you have employees you’d like to give stock to? Because you can do all of that as a private company,” says Shefter. So before meeting with investors, it’s essential to pinpoint exactly why you want to pursue and IPO and how it will benefit the business in the long run.
Demonstrating the Potential for Growth
When evaluating companies poised for an IPO within the next 12 to 18 months, investors tend to look at a few key metrics, such as profitability and gross profit. Companies should be prepared to discuss these benchmarks — among others — to help investors gauge growth potential.
- Profitability: “The current market is indicating that right now, it’s OK for a company that’s not profitable to go public,” says Walsh, “but you absolutely need visibility and line of sight into that profitability over time.” Alternately, there’s little tolerance for companies that will not be anywhere near cashflow breakeven in the next five years.
- Gross profit: Shefter considers gross profit a key metric. “If you’re not consistently hitting a gross profit margin that is similar to or better than some of the public comps, then it’s hard to make everything else work,” he says.
Investor Engagement Leading Up to the IPO
How far ahead of the IPO should companies begin meeting with investors? “We love to meet with companies as early as possible,” Shefter says. “Sometimes two years in advance — just to develop a dialogue, think about what management is looking to do over time, how they’ve hit certain thresholds, and whether they’ve done what they said they were going to do.”
This not only helps them determine which companies have the potential to move forward as a public company, but it also equips them to move more efficiently through the IPO process once it finally begins. “By the time they go public, we’re not starting from scratch and building the model and getting to know each other,” Shefter adds.
Walsh explains that his team at Corbets Capital dedicates about 10% of their time to meeting with private companies. This gives them the opportunity to provide feedback as the company grows. “Having taken a lot of companies public, we’re now on the other side and want to be as helpful as we can,” he says. Generally, his team may meet with companies a year out from an IPO, but he notes, “We’re open to meeting with companies at any stage if they have an IPO in mind in the near future.”
Accounting for ESG Factors
In every interaction, companies should keep in mind that many investors heavily consider environmental, social, and governance (ESG) factors. Shefter, for instance, explains that Norges Bank incorporates ESG into every investment they make. “It’s about identifying potential risks,” he says — especially when the firm will be on the cover of an S-1. “In that case, we perform integrity checks on the company, on the management team and board, on everyone, to make sure we’re not missing something.”
Chaudhary goes on to explain that Norges Bank works for the people of Norway, investing their sovereign wealth. “As a culture, they’re very invested in ESG matters, so it has to be a part of all of our investment processes.” That means there’s no separate ESG team taking meetings with private companies; all portfolio managers understand ESG matters.
The Bottom Line: Hit Your Numbers
For companies looking to pursue an IPO in the near future, Walsh offers this final piece of advice: “Make sure you can hit your numbers and you understand your business. It’s very difficult to tell your story and sell it to the Street when you’re not necessarily sure what’s going to happen in the near future. And if that’s the case — every company has that in its lifecycle — it’s probably better to wait until you have visibility into that.”
Shefter recommends being conservative in your guidance — but not too conservative. “If you’re too conservative, then the buy side isn’t always sure when a beat is really a beat, and then you have numbers all over the place and it creates a lot of noise,” he says. “It’s about consistency, sustainability, and beating and raising. That’s the key.”
Meeting with investors is just the beginning of the long road to an IPO. To move through that process more smoothly, download our comprehensive eBook, “Insider’s Guide to Going Public,” which lays out best practices, advice, and insight into common pitfalls in the IPO process.
