Public Opinion

Make Friends Now

IPO-bound firms should also communicate early and often with potential underwriters. Investment banks can offer invaluable feedback about issues that need to be resolved prior to an IPO launch, such as a customer base that is too concentrated or patents that need to be approved prior to registration. In addition to helpful counsel, opening a dialogue enables the company to build relationships with possible backers--and, when the time is right, choose the lead investor that's right for them. "We met with different underwriters to get to know them and keep them updated on our science," says Johnson, recounting 8-year-old MitoKor's path to IPO registration.

Meetings with investment banks should be viewed as a get-to-know-each-other first date rather than a deal-making opportunity. "Don't be afraid you'll screw up your chance to pitch, and don't think it's too early to talk to investment bankers," says Barnes. "Getting to know them now puts your company on their radar screen."

It also lets you ask tough questions, such as how the stock will be distributed, how it will be managed after the IPO, and what kind of analyst coverage you can expect--all of which figure significantly in a stock's performance. Prospective underwriters should have a rational distribution strategy, sector knowledge, and the ability to generate interest. "Beyond that, you're looking for chemistry," says Jensen, who counsels firms going through the process.

"Do what's right for your business, not what you think will get you to the market faster."

But powerhouse investment banks such as Lehman Brothers, Morgan Stanley and Salomon Smith Barney boast better access to investors and an inside track to analyst coverage. "A big bank brings big clients and big capital access," says Barnes, who went through an IPO as controller and director of investor relations at speech-recognition technology firm Voxware and now counsels PA Early Stage's portfolio companies on growth and exit strategies.

While big banks bring cachet, small banks deliver more personal attention. "The market is telling you something if the only one who will take you public is a small brokership," adds Barnes. While there are situations in which going public is imperative--such as when an IPO will facilitate international expansion or is a deal-breaker with potential clients--the move is likely to be off-strategy.

Yet once the possibility of an IPO is raised, many entrepreneurs become so embroiled in turning it into a reality that they lose sight of how the offering fits into the big picture. Often, new offerings are viewed more as exit events than the financing avenues they're meant to be--which is dangerous. "You want to make sure you're not becoming a chief 'going public' officer as opposed to a chief executive officer," warns Bartlett. "Do what's right for your business, not what you think will get you to the market faster."

After all, in the current climate, faster is not necessarily better. Given today's deeper discounts, skeptical investors and strict financial prerequisites, slow and steady sounds preferable. "The best thing you can do right now is to try managing your business so you are not at the mercy of a tough capital market," says Barnes. "If you're building a sound business and creating value, there will be opportunities to exit down the road, even though it seems awfully dark out there right now."

What About M&As?
Contrary to popular belief, not every entrepreneur is lusting after that elusive IPO. In fact, a growing number are opting out of the race, citing the headaches and expense of the process itself, not to mention sinking valuations and the pressures of the public sphere. "It's a lot easier to adapt your business model when you're not a public company," points out Don McMichael, a principal at Ali Ventures LLC, a New York City real estate and entertainment marketing firm. "You can explain what's going on and what you want to do to a small number of well-informed investors. If you're public, it's 'Oops, we had a bad earnings report; there goes 50 percent of the value.'"

A merger and acquisition (M&A) can deliver an infusion of capital without subjecting you to the hassles of the infamous three-ring-circus-like road show and pressures of Wall Street. The downside? The payoff may be lower, and acquiring companies often want you, the company's founder, gone. "In an M&A event, the buyer buys the company and does with it as [he or she] will," concedes PA Early Stage's Steven Barnes, who advises companies to give serious consideration to the M&A option. "That can range from buying your business and having no interest in you or your employees to giving you the autonomy to keep growing the business along with the upside of the parent company's stock price."

That doesn't scare AuthenTec's F. Scott Moody. "We're open to both exit strategies," says Moody. "In fact, I've told everyone in the company that they have immediate signature authority to sign an acquisition offer of $250 million and up. Don't even bring it back; just get the deal done."

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This article was originally published in the October 2002 print edition of Entrepreneur with the headline: Public Opinion.

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