As CFO at Smartsheet, I had the privilege of working through our IPO in April of this year. It was actually my second IPO — my first was as the VP of Finance with Box, which went public in January 2015.
Though extremely demanding, initial public offerings (IPOs) are among the most rewarding events that a company can undertake. The most successful IPO journeys begin with internal readiness and planning; the better prepared a company is going in, the more efficient and, ultimately, less costly the process will be. For those who may be considering an IPO, here are four insider tips from my personal IPO journeys.
1. Market Timing is Key
Market timing and preparedness are critically important. When I was at Box, we started the IPO process in favorable market conditions. Investment bankers, eager to participate, believed that high growth SaaS companies were in-demand and Box, like its peers, didn’t need to be profitable if the growth opportunity was significant. However, by the time Box filed its S-1 publicly 6 months later, public SaaS company stock prices had begun a significant decline. This resulted in Box having to delay its IPO for nine months until investors regained confidence in these business models.
Since you can’t predict future market conditions, be prepared with a back-up plan in case market sentiment changes, continue to execute on the business opportunity, and be ready for when the market opens up again.
2. Own Your Story
At both Box and Smartsheet, internal teams prepared a first draft of the business and risk sections of the Form S-1 before sharing it with bankers, lawyers, and accountants at our respective kick-off meetings. This approach saved us considerable time in getting our S-1 over the finish line. At Smartsheet, the first draft of the S-1 was submitted to the SEC in less than four weeks and we ended up getting only ten questions back from them (on the very low end for follow-up questions based on our research).
While we collaborated with third parties and sought their counsel, we strived to guide the ship. We also found ways to use Smartsheet to manage and automate the S-1 process, resulting in significant cost and time efficiencies.
3. Choose Your Bookrunners Wisely
Picking your bankers may be one of the toughest things to do. You’ve likely built good relationships and everyone wants to participate in the offering. My recommendation is to select one or two active bookrunners first and pay them close to the same, especially if you expect them to do the same amount of work.
Smartsheet used two active bookrunners for its IPO. About six weeks before we filed publicly, we then reached out to invite the remaining passive bookrunners and co-managers. These banks were selected based on previous relationships and the research analyst’s level of understanding of our business model. Waiting as long as possible to invite others to the party allowed us to maintain an efficient and confidential process.
4. Price For the Long Haul
At Box, we priced at the high end of the range at $14 and its first day price increase was 66%. At Smartsheet, we priced a dollar above the range at $15 and our first day price increase was 30%. I believe Smartsheet had a better outcome because of the lower first-day increase. This may seem counterintuitive, but let me explain why.
When public investors get a large one-day profit, they are more likely to sell at the open. Then, the company may not have as many new investors ready to pick up the shares from these selling shareholders because of the higher price, newness of the company, and lack of liquidity prior to the 180-day lock-up expiration. When investors make less money on the one-day pop, more may stay for a longer time period, resulting in better price stability. This is why I believe it may be more optimal to push for a slightly higher price than your bankers might recommend — even if you scare away some big public company investors. This is particularly true when the demand for shares significantly outstrips supply.
If an IPO is in your future, here’s one more suggestion: remember to thoroughly enjoy the ride and live in the present on the opening day at the NYSE or NASDAQ, whichever you choose. It’s a special day to celebrate a big accomplishment with founders, investors, employees, families and the teams hired to help make it all happen. Afterwards, get right back to the office and get busy executing!