From the November 1999 issue of Entrepreneur

Initial public offerings are the great brass ring of entrepreneurship. They make you rich; they make you famous for a little while. They offer the unmistakable signal that you and your company have arrived.

But don't confuse matters. Just because you meet with success doesn't mean an IPO is in the offing. Aside from size, scope and industry issues, the timing for an IPO has to be right.

At the broad-brush level, the issue of timing would seem to be a simple one. Is the market receptive to IPOs or isn't it? Timing takes on much more dimension when you're deciding whether to go for the public's gold.


David R. Evanson's newest book about raising capital is called Where to Go When the Bank Says No: Alternatives for Financing Your Business(Bloomberg Press). Call (800)233-4830 for ordering information. Art Beroff, a principal of Beroff Associations in Howard Beach, New York helps companies raise capital and go public. He is a member of the National Advisory Committee for the SBA.

Great Expectations

Consider the case of Reflective Technologies Inc. Bob Rizika, 33, along with his brother Adam, 37, and his cousin Dan Rizika, 34, developed technology that converts proprietary materials into reflectors and co-founded their Cambridge, Massachusetts, company in 1993. These reflectors, when embedded into fabrics, coatings and other materials, reflect oncoming light in a way that illuminates the full silhouette of the wearer. The technology led to Reflective's first product, IllumiNite, a safety-enhancing reflective fabric that has applications in activewear, outerwear and industrial markets.

After two challenging years of research and development, sales have grown steadily from $600,000 in 1996 to a projected $6.1 million this year. In addition, the company has attracted strong strategic and financial partners along the way: Giant Taiwanese textile manufacturer Formosa Taffeta, for example, made an investment in the company.

In July, Reflective raised $7.5 million in venture capital. According to Reflective's CFO, Stuart Krentcil, funds from the deal were earmarked for, among other things, stepping up production to meet what the company anticipates will be burgeoning worldwide demand for its product.

In many ways, says Krentcil, the firm's latest deal sealed its future fate. After all, investors who make a large financial commitment must someday cash out. Therefore, Reflective will at some point need to consider either being acquired or going public.

If they choose the latter scenario, the Rizikas and Krentcil will have to decide when the timing is optimal. Here are some of the factors they should be considering.

Investment Considerations

Is the window open? This is the most obvious, and least controllable, factor in a company's decision to attempt an IPO. The opportunities for IPOs are often discussed in terms of "windows"--the window is either open or shut. During the third and fourth quarters of 1998, when the Dow took its precipitous 1,700-point drop, the window was tightly shut. In 1976, there were just 16 IPOs completed. The window, if not shut, wasn't open more than a crack. At the dawning of the second half of 1999, the window was open, as the market was receptive, even eager for IPOs. So the first lesson about timing your IPO is to make your attempt when the window is open. But that's just for openers. Other factors that will enhance your chances of completing a successful IPO include:

  • Your industry is in favor. This is almost self-enforcing. That is, if your industry is not in favor, you'll have a hard time even getting an appointment with an investment banker to discuss an IPO, let alone pull one off. Presently, energy companies are out of favor. So are financial-services companies. So are aviation-services companies. If you run a business in any one of these sectors, it's not time for your IPO.

A slightly improved position is being in an industry that is not out of favor. Presently, application software companies, though not as in vogue as they were in the late 1980s and early 1990s, are at least considered palatable. Of course, the best position is to try an IPO when your industry is in favor. For instance, if you run an Internet company, the timing for your IPO couldn't be better.

For better or worse, Reflective defies any easy industry category, meaning it can't be hurt or helped by any such industry favor. The company will have to place more emphasis on other areas, such as underlying markets, management teams or financial performance.

  • You are about to turn the corner to profitability. Companies sometimes go public when they're posting losses. You hear about them, not because it's so common, but because it's so uncommon. But there is far less publicity surrounding the slow death the stocks of these companies face, as quarter after quarter of losses pile up and investors lose all interest. It's far better to go public and report ever-improving earnings than it is to go public and report ever-narrowing losses.

Krentcil says that since Reflective is not an Internet company, where the above rules do not apply, the level of profitability will play a vital role in the firm's IPO decision-making process. "We might be able to entice an underwriter into doing a deal now," he says, "but with the better earnings we're projecting, we think we can get a much higher valuation in our deal by waiting a little longer."

  • Your company has a layer of professional management in place. Going public is an incredible drain on a company's human resources. So if you're the in-house visionary who is also responsible for executing the strategy, monitoring that execution and tinkering with the strategy midstream--while selling all this to investors, keeping them updated, and feeling good about it--then your IPO is a 911 call waiting to happen.

At Reflective, Krentcil says he believes his team is in place. "Our board is complete, and we have the key marketing, legal, financial and sales positions filled."

The reason an incomplete management team spells disaster is that the growth an IPO is generally predicated upon can't occur when management takes its eye off the ball to keep investors happy. One software company went public in 1996 with a deal premised on getting the 1997 version of their sports entertainment software to market by the Christmas selling season. Senior management spent so much time executing the IPO that the product never made it to market. Today, the company doesn't even exist.

  • There is a logical set of buyers for your deal. This is difficult to explain but is nonetheless an important concept with respect to the timing of your IPO. Specifically, does the nature of your business make your deal appropriate for institutional or retail investors, and is it appropriately sized for the buyers? For example, most biotechnology deals today are bought exclusively by institutional investors. Why? Because they are far too complex for individual investors to understand.

This institutional orientation means, however, that deals must be in the neighborhood of $25 million with a market capitalization (total shares outstanding times price) of at least $100 million. Therefore, if you need to raise $5 million for a biotechnology company, your timing is probably off, and your company needs to be much bigger before you attempt an IPO. On the other hand, Internet deals can be purely retail, meaning that even as a start-up in search of, say, $7.5 million, your timing is on, and you can probably pull off a deal.

End Game

Taking all the above factors into consideration, Krentcil figures that, given the heady market for IPOs, Reflective is an able candidate. "Our timing would be off only from the perspective of our earnings growth," he says. "However, the proceeds from our most recent offering can help us dramatically increase our overall growth rate, which will improve any deal we might do in the future."

Of course, every successful deal requires not only good timing, but also a certain amount of luck. But if luck is defined as the point where opportunity and preparation meet, then you can't sit by, idly waiting for your time to come. You've got to prepare by creating the kind of company that public investors will want to invest in, not just because it's time to do so, but because it's also a great deal.

Next Step

Analyze the IPO market. Hoover's Online offers a wealth of information you can use for this purpose at http://www.ipocentral.com If you find that the market appears to be receptive to deals in your industry, consider your readiness on other fronts such as the strength of your management team, profitability and industry trends.

Contact Sources

Reflective Technologies Inc., 15 Tudor St., Cambridge, MA 02139, e-mail: skrentcil.rti@lln.com