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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."
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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." |
Jennifer Pellet is
Entrepreneur's "Money Buzz" columnist. Contact Sources
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