Not so long ago, IPO was considered a four-letter word. After the IPO bubble burst in 2001, there were so few small businesses that could go public that it seemed as though the opportunity was lost forever. But if the momentum building in 2007 is any indication, the curse may finally be lifted. This year, IPOs are on track to exceed--in both number and value--every year since 2000. According to Renaissance Capital's IPOhome.com, 114 companies had raised $26 billion by midyear.
Does that mean boom times are back? Not quite. "The market is good--it's not great, [but] it's not frothy," says attorney Peter Townshend, a partner in the private equity/emerging companies practice group of McDermott Will & Emery LLP. "Good companies that make sense and are meeting their milestones are able to go public and sustain themselves."
Dr. Philipp Lang is betting on the trend. As founder and chairman of ConforMIS, a venture-backed medical device company in Burlington, Massachusetts, Lang is cautiously preparing his company for an IPO run in 2008. There's more opportunity for emerging companies now than in the recent past, says Lang, 45, but to make an IPO work, you need strong fundamentals and a clear path to profits.
If 2008 sounds like a good year for your public offering, review the basics below to be sure you can show investors a solid opportunity.
- Product: A great product gives investors something to believe in, but today's investors really want to see sales growth, says Lang. "You need to either have a [product] that everybody believes will take a significant market share or prove it by actually generating the sales." ConforMIS is opting to prove its mettle by getting 12 to 18 months of sales under its belt before visiting Wall Street. Lang projects 2008 sales of $10 million to $15 million.
- Money: These days, doing an IPO is not about raising survival money, says Townshend. You need to have a strong balance sheet with plenty of cash before embarking on an IPO. Townshend encourages clients to seek significant VC investment or a substantial mezzanine loan in the months prior to filing IPO documents.
- Clarity: A good story still sells, says Townshend, but a convoluted sales process or obscure markets can kill even the best deal. "It has to have a clear business model--clear, rational and defensible," he says. A well-articulated message helps investors, analysts and journalists get comfortable with--and promote--the business opportunity.
- Team: Prior to any IPO, make sure a complete management team and solid board of directors are in place. ConforMIS is putting the last pieces of its team together by bringing on a full-time CFO. "We'd like that person to have IPO experience," says Lang. "Not just any IPO, but a really successful IPO with happy investors." That CFO will lead the charge with Wall Street investment banks and underwriters.
- Size and Scale: In the public market, size always matters. Small companies have a chance to list their stock but will ultimately only be successful if the potential profits are large enough to support public market valuations. "It has to be scalable; that goes across industries," says Townshend.
- Financial Systems: In the face of Sarbanes-Oxley mandates, it may take a large accounting firm to put appropriate audits and processes in place, but even so, clean books are essential. Lang is getting busy. "We used a smaller accounting firm--appropriate at the time," he says. "But now one of the Big Four is going back and auditing the past three years."