Scrapped IPOs on pace to set record this year (Bloomberg News 10/3/2011)
Yelp, others dive for IPO window after Groupon (Reuters 11/8/2011)
Before you “dive for the IPO window” make sure you know how much it really costs.
Recent filings for IPO’s suggest the current out of pocket cost, before consideration due the underwriter, are running between $4 and $5 million. Most of these costs go to the outside attorneys, accountants and to a lesser extent the various regulatory filing fees. This doesn’t count the internal costs of improving the management, board, governance, public relations and reporting systems. These costs can also run into the millions. Lastly, don’t forget the underwriter’s piece of the action will be approximately 5-7% of the total offering.
Other expenses surrounding an offering should include outside consultants such as speech and public relations consultants, travel costs for the roadshow and even personal wealth consultants to instruct shareholding employees of their rights and responsibilities during after the offer. While generally not material to the overall cost, they should be included in the budget.
In addition to the measurable costs, remember that the amount of management time can be an enormous distraction. Preparing for an IPO is an almost full time job for a CFO and other key members of management. The CFO should make sure that a strong support staff is in place to managing the day to day financial management of the business, thus giving the CFO the opportunity to focus on this monumental task
Lastly, there is the ongoing cost of running a public company. For an average sized, “baby public company” of $100m-$250m in revenue, the additional overhead can be upwards to $1m per year.
Planning for an offering typically starts between 4-12 months in advance of the offering date with an emphasis on the high side of that timeline.
In our experience, companies who do a poor job of planning for a public offering spend 2-3 times the aforementioned costs.
Finding the “window” for an IPO can be iffy proposition. A prudent CFO will make upgrades to the infrastructure keeping mind that at any time an offering may be pulled. Hence, infrastructure upgrades, first and foremost, should be a good return on investment for the company.
Cloud computing is all over the lips of executives nowadays as more and more companies consider moving from licensing and do-it-yourself software to renting their software as a service. What is “cloud computing?” It’s simply the new name for the computer network where your accounting software resides, which is connected to you via the public internet. The bottom line of cloud for CFOs is a very compelling and disruptive cost model versus licensing accounting software, that is now a realistic alternative because of the ease of access to the ‘net.
Beyond cost, the crucial advantage of cloud is the elasticity that it provides; which simply means the ability to scale up or back down rapidly without adding more internal capital infrastructure, and only pay for what you use. In fact, you may not even need an internal IT department at all to support your use of cloud software.
The advantages of cloud go on and on. The monthly operating costs are very predictable. The system can be accessed from anywhere that you have network access (in other words, anywhere – all those home workers?). You always have the latest rev – automatically. Your data is always backed up, away from your offices. It allows you to automate and dispense with manual processes. It provides a clear path to integrate your planning tools (the future) with your day-to-day accounting and reporting tools (the past) and performance measurement tools (the present) into a more “seamless” real-time business management system.
So, what is our advice on cloud to CFOs? Be cloud-wise, not penny-wise. But don’t be cloud-foolish.
Most leading edge CFOs are already cloud-wise. What we see, working for many of the most successful companies in the US, is that leading edge CFO’s are indisputably moving more and more of their planning, accounting, reporting, performance measurement and day-to-day processes to cloud software. What’s driving this? They are taking the chance to eliminate out-of-date systems that are fragmented and that lead to long monthly closing processes. They are also automating labor intensive reporting processes, reducing errors, and ultimately therefore providing senior management with better up-to-date snapshots of the state of their businesses.
Unfortunately, we also see too many others electing to go with the absolutely cheapest initial accounting solutions in an attempt to be penny-wise. Then these systems more often end up unable to cope with complexity such as multiple entity and or multiple currency operations. While a suitable cloud ERP solution may cost perhaps $15,000 in annual rental fees and a similar amount in initial setup, it will have all of the capabilities to grow a company to a substantial size cost effectively over time. While $30,000 might seem substantial amount to an early stage company, the total cost of ownership is quickly reduced over the medium term using software over the cloud.
We can’t tell you which software to choose. That, of course, depends upon the features, capabilities, price, experience, staying power and reputation of the vendor. We do predict, as do many analysts, that this move to cloud-based planning, accounting, reporting and performance measurement will only continue to accelerate. More and more vendors will provide ERP, database, planning and other applications in a huge range of configurations and price ranges for startup, fast growing, mid-range and large businesses alike.
But we do advise.. consider cloud very seriously as your leading –edge competitors are probably doing so.
While the functions in the “back office” of an organization are core to its success, these crucial activities are often given a back seat. In the early stampede to get a company up and running, with attention on getting products or services out to customers, back office functions such as finance, accounting, human resources and IT frequently do not get the necessary focus. In my experience, company founders make several common mistakes.
Mistake #1: Trying to do it all
Entrepreneurs are a special breed; not just anyone can start a company. Founders, especially in the technology industry, tend to be brilliant, creative and very hard working. As a result, they also tend to think they can do it all, and what’s more, they think they should do it all. If success is their goal, nothing could be farther from the truth.
Common refrains I’ve heard from my clients include: “I’ve worked in finance before” and “I had an accounting course in college” and even “I don’t need sleep.” They figure they have the knowledge—and if not, they can figure it out. And they figure they have the bandwidth—even if it means sleeping under their desk at night. However, smart founders know that early on they have to give up doing it all in order to run the company. If they are mired in the details of bookkeeping, IT and the hiring of employees, they will lose sight of the business goals, customer needs and product development. By trying to do it all, company founders limit the speed at which the company can grow.
Mistake #2: Hire weak, cheap and/or late
To their credit, entrepreneurs are typically very frugal, often even after they have secured funding. But the old saying is true here: you have to spend money to make money. More specifically, company founders need to understand that they must hit key milestones to secure funding, or to secure follow-on funding. Critical to achieving key milestones is hiring a good team.
What I commonly see is early-stage CEOs who try to save money by hiring people without the right experience, or delay hiring even when a role needs to be filled. I have seen my clients:
– Hire someone with little or no experience
– Hire a relative or a friend
– Rely only on Facebook friends to find staff
– Hire all by themselves with no technical review
– Hire only when current staff threaten to quit
Here is my advice to those entrepreneurs: if you don’t run fast and hard–and even run scared–you’ll never make it. You have to make expenditures in the areas that matter most toward company growth, and that’s people.
Mistake #3: Defer maintenance of the financials and IT systems
Sadly, this is one of the most common mistakes I see company founders make. In the crush of getting a business up and running, it’s easy to ignore the back office, but extremely dangerous to the health of the business. I’ve seen a profitable company be denied a bank loan because its tax returns were wrong. Even worse, I watched a company with a successful product be driven out of business because it lacked the back office systems to manage its inventory and distribution. In both cases the CEOs ignored advice from GCG to get their back offices in order.
Like it or not, the back office is mission critical to the well being of the company. Too often company founders only address it once they are forced to, which can be too late. It seems inconsequential until a crisis occurs. The greater the number of employees, customers and revenue, the more critical it becomes.
It’s not just prudent, it’s essential to get the back office in order—from the start, not under pressure when the costs as well as the risks can be three to five times higher. Get started early, hire smart, and consider bringing in outside expertise and a flexible staff to help. It just might make all the difference in the front office.
I have long been a fan of Alan Sillitoe’s novel “The Loneliness of the Long Distance Runner.” Set in the 1950s, it tells the story of a troubled youth who ends up in a juvenile reform center. While incarcerated, the boy shows a talent for long distance running and is allowed to leave the confines of the center for early morning runs. In the 1950’s distance running was a very lonely sport. Fast forward 50 years, and distance running is no longer lonely; shoes, clothing, technology and running clubs cater to runners of all distances and abilities and make them feel connected.
Private equity CFOs may at times feel like that lonely runner. But they need to know that they are in fact not alone. Over the last decade or so, I have spent many hours pondering the issues and problems that face private equity CFOs. Entrepreneurial partners of venture firms want to do deals quickly and sometimes on unique terms, and they look to their CFOs to make it happen. At the same time, CFOs are on the receiving end of an ever-changing regulatory environment. How can anyone possibly keep up with all of the potential changes in tax legislation? Fair value reporting, financial highlights, uncertain tax positions and clawbacks have been just some of the many buzz words around the venture community over the last few years, while every new foreign investment or LP seems to bring its own set of issues that fall upon the CFO to address.
Do private equity CFOs have to feel isolated, surrounded by more questions than answers? Do they need to feel stupid when they don’t understand an issue? Should they blame themselves when they don’t anticipate every potential outcome and fail to warn Managing Directors and portfolio companies about them? The answer to all of these questions is a resounding “No.”
Opportunities to connect with other private equity CFOs and financial experts do exist. I would encourage everyone in our line of business to attend at least one of the annual conferences that are designed to examine current issues and educate participants. Also, maintain a regular dialog with your outside legal counsel, audit firm and tax adviser, and build a network of others to share concerns and information.
At GCG, our team of seasoned CFOs and controllers have extensive experience in this field, and among us there are very few situations that we have not handled. We maintain regular in-house training sessions to keep current on critical issues, and our client work includes everything from assisting with fund formation and setting up infrastructure to final dissolution and distribution of assets at the end of a fund’s life. It can be a lonely world, but it doesn’t have to be. GCG can work with you to navigate through the myriad of issues that we regularly face. We can help you stay connected.
I recently had dinner with a CFO friend of mine as she lamented the lack of potential for a liquidity event for her company. I couldn’t believe my ears.
According to Dow Jones VentureSource, the total number of venture-backed exits—514—was up 25 percent year-over-year in 2010, approaching the 613 reported in 2007. The total amount of money raised in those transactions was more than $40 billion, up 72 percent year-over-year.
Dow Jones VentureSource also reported that there were 445 M&A transactions that raised $33.9 billion in 2010, compared to 381 transactions that raised $20.8 billion in 2009. Venture-backed IPOs too were on the rise, from 46 in 2010, compared to only 8 in 2009. And these numbers are expected to increase in 2011. The market has finally opened up; the time to sell has not been this good in a decade.
After talking more with my friend I realized she had missed some key steps in helping create opportunity for an exit. Here are some considerations for any CFO who believes his or her company should be well positioned for an acquisition.
Identify strategic candidates as potential buyers, and investment banks as potential partners. I asked my friend if she knew who led the business development group for those candidates or who their investment bankers were. I shared with her that potential strategic buyers typically include competitors, companies in a tangential space or private equity firms that specialize in specific industries. LinkSV, LinkedIn or Hoovers are research sources that could help identify the right buyers.
Most companies at this stage wouldn’t have an investment bank (“ibank”) engaged but may have been courted by one. Partnering with an ibank can be a distraction and even a risk if employees divulge too much information. But if you manage the relationship with an ibank they can be helpful. Several years ago I was an acting CFO at a popular gaming company being pursued by multiple ibanks. Together with the head of business development, I managed access to the employees they wanted to speak with and ended up creating a “feeding frenzy” by limiting that access. The result was a $27 million investment round that included both VCs and strategic investors. The company’s goal was to raise as much capital as possible at the greatest value, and we did. At the same time, we brought potential buyers into the fold in the form of strategic investors.
Determine clear financial metrics your company needs to reach or exceed. Over dinner that night, my CFO friend and I talked about what she could do to establish the right metrics then create a strategic and tactical plan to help achieve them. Regardless of industry, the best run companies build a management dashboard with metrics that would be understood and valued by the outside world. For a social media company that might be the number of subscribers or subscriber acquisition cost; for a SaaS business, the key metric would be attrition, or the “churn” rate versus subscriptions and renewals. For retail the key metric might be sales per square foot. By knowing, measuring and reporting on metrics, you may have early predictors of change that will be of interest to a potential acquirer. It’s the CFO or senior finance staffer who should be driving this practice.
Build a team of professional advisers who could augment your team in the event of a potential sale. It turned out my friend was operating with very little outside counsel from attorneys or accountants, so we talked about what kinds of key expertise she needed. In any rapidly-growing business the most precious commodity is time. No CFO can be an expert in everything and must surround him/herself with others who are up to speed on the business and can jump in to add their time and skills. With her business in mind, I recommended several reputable audit, tax, legal and human resource experts. Later, she was able to establish relationships with each of these experts, building a deep professional bench to reach into when the time came.
Make sure your “house” is in order. The main consideration here is can your company withstand the due diligence of an acquisition? Sometimes CEOs and CFOs don’t know what they don’t know, especially when a company has grown rapidly. I worked with a client operating in nine countries. When I asked how they were handling their taxes they said they weren’t; in fact, they didn’t even know what their tax exposure was. Rapidly growing companies tend to cut corners all along the way due to limited resources and time. It’s often necessary to engage additional help to bring the company up to due diligence readiness. Managing this early is much less expensive than doing it when a deal is already in process. One client of mine grew so rapidly in two and a half years that the number of employees stayed the same while revenues grew from $9M to $27M. When a potential buyer came calling, this company was ready.
My friend’s circumstance is not uncommon. We are often so focused on managing the current tasks with limited resources that it becomes difficult to take the time or have the discipline to look for the ideal exit. However, a good CFO is always on the lookout to maximize shareholder value through a profitable sale, if not an IPO.