Public School

Learning how to prepare for an IPO.
Magazine Contributor
8 min read

This story appears in the October 1997 issue of Entrepreneur. Subscribe »

It was only a matter of time before the digital revolution and the Internet took aim at the photo processing market. After all, according to Andy Grove, one of the founders of Intel Corp., any information that can be digitized will be digitized.

One of the first companies to establish a beachhead in this, well, developing market was Herndon, Virginia-based PictureVision Inc., co-founded by Phil Garfinkle, Yaacov Ben-Yaacov and Elliot Jaffe. The trio met through a joint venture between an American company where Garfinkle was employed and an Israeli technology company Jaffe and Ben-Yaacov worked for. With PictureVision technology, consumers can share, manipulate and store photographs on the Internet.

To develop and roll out this kind of service takes capital, and plenty of it. The sheer excitement and size of PictureVision's market made the always-difficult task of raising money to fund the business somewhat easier. Since opening its doors in late 1995, PictureVision has raised $9.3 million, with more deals in the pipeline.

Very early on, the partners knew PictureVision was on an initial public offering (IPO) track, says Garfinkle, whose previous position was with a public company. "An IPO is the only way we can access the volume of capital we need," he says, adding that outside of an outright acquisition, an IPO would be the only way for early-stage investors to cash in on their investment. So, with a public offering looming in what Garfinkle and his partners, investors and employees hope is the not-too-distant future, PictureVision has started to clean house and position itself for a major-league debut.

Unfortunately, according to Glenn Bierman, founder and chairman of Tycon Equity Partners LLC in New York City, companies sometimes fail to bring their offering to fruition simply through lack of proper planning. Bierman should know: As an investor in many early-stage companies, his company's ultimate return depends on the ability of the companies it invests in to go public. "One of the most important strengths we bring to the table is helping companies structure and present themselves in a way that will be attractive to the capital markets," Bierman says.

What follows, according to Garfinkle and Bierman, are strategies and tactics entrepreneurs must consider now if they think there's an IPO in their future.

  • Break out of the box. It goes (almost) without saying that every company looking toward an IPO must build a strong management team. And if you are dead serious about building the kind of company that investors will stake millions on, says Garfinkle, you've got to be willing to hire outside of your own network.

For many emerging growth companies, Bierman says, an underwriter's decision about whether to do a deal hinges on the team they'll be turning the capital over to once it's raised. "Ideally, you want a team with lots of industry experience that can walk into a room and take command of it," says Bierman. In most cases, the reasoning goes, those names are not lurking in a small-business owner's Rolodex.

For Garfinkle, finding this kind of talent meant retaining professional search firms to fill key posts in marketing and executive management. If you don't have the funds for a search firm, running ads in national trade publications is another good way to find employees who can bring new thinking to the table.

  • Enlist top-flight accountants. According to Bierman, the best accountants for companies considering an IPO come from the so-called Big Six firms. "The reason is simple," says Bierman. "When you're ready to go public, you want to instill confidence in investors, and by and large, investors universally trust the Big Six." Moreover, he adds, while regional or local firms may have the same skills and talent their larger bean-counting brethren do, IPOs are generally sold nationwide, and only the Big Six have national name recognition.

Perception aside, there are several technical aspects of financial accounting that must be addressed early on. For instance, issues such as how to recognize revenue, whether to keep books on a cash or accrual basis, and whether to record investments in research and development as an asset or an expense are policies that will be scrutinized when a company files to go public. "If these are not right from the start, it causes delays," says Bierman. "And nothing kills an IPO more quickly than unexpected delays in the process."

  • Build a board. Investors want to see a board of directors that will help a newly public company make sound decisions. As a private company, you can build a board of directors in which you have confidence. Garfinkle says that entrepreneurs must also build a board of directors that has confidence in you and can help maximize the company's value for the public shareholders. PictureVision is now bringing in board members who, while outsiders to the company, have broad-based industry experience in photography, the Internet and telecommunications.

"For companies on an initial public offering track, the board's relationship with the founders becomes a two-way street," says Bierman. "Not only do the founders have to be comfortable with the board, but the board must be comfortable with the founders since collectively, the board will be accountable to public investors for what senior management is doing with the company."

  • Grow up. Tiny or early-stage companies tend to enter into relationships on a handshake and a hope. Operationally, this may work out fine, but it won't survive the scrutiny of an IPO. "You might work out deals where some customers get certain benefits that others do not," says Garfinkle. "Unfortunately, what the underwriters and the attorneys want to see are standardized procedures and contracts so that everyone is equally protected."

This idea extends beyond agreements with suppliers and vendors and, ideally, applies to virtually every aspect of the company's life. Independent contractors, for example, are most often converted to employees because this gives the employer more control and less chance of problems with the IRS. And rather than telling employees to sink or swim, performance reviews become standard operating procedure. Patents and trademarks, rather than simply being discussed, are applied for and vigorously protected.

  • Set up benefit plans. Most high-octane companies run on people. But you can't possibly hope to attract the strong talent you need without a benefit plan. Of these, the most important is an employee stock option plan. "As a growth company, you might not be able to match the salaries offered by more established ones," says Garfinkle, "but you can bridge the gap by offering potential employees the opportunity to cash in on the future."

While stock option plans are important for the rank and file, Bierman says they are a must for the senior-level people a company needs to recruit. "Many times the senior management that we recruit for companies have had prior successes, so they aren't looking for the big salary as much as they are the large upside potential that can come with options or other forms of equity participation."

  • Build bridges to the financial community. As PictureVision has grown over the past several years, Garfinkle has spent more and more time networking with members of the financial community. "I've been working with investment banks and their analysts," he says. "Believe it or not, many of our potential customers call these analysts to find out about us. In addition, though our transaction may be down the road and we haven't yet selected our investment banker, we can use this time to figure out who the best partner is for PictureVision."

But there's more. Bierman says the other piece of the puzzle is that analysts and investment bankers can give you feedback on business models. "A lot of analysts help you wear binoculars by alerting you to trends in the industry," he adds.

Building bridges to the financial community can take time, Garfinkle says, because it's often difficult to get to the senior-level investors who are interested in your particular kind of company. But ultimately, to make money, investment bankers must do transactions, which means they're always looking for prospective candidates. The entrepreneur's task is to convince the investment banker his or her company can go the distance and that it's worth their time to develop a relationship.

  • Hire good help. Some of the most challenging aspects of preparing for an IPO relate to personnel, says Garfinkle. The migration from a start-up to a high-growth enterprise means that entrepreneurs must constantly realign personnel into more narrowly defined responsibilities. "That's a significant challenge," Garfinkle says. "My advice: If you can afford to, hire to meet the needs of the business you anticipate generating, not the business you're currently generating."

Contact Sources

PictureVision Inc., 250-A Exchange Pl., Herndon, VA 20170, (703) 733-0500

Tycon Equity Partners LLC, 725 Fifth Ave., Trump Tower, 19th Fl., New York, NY 10022, (212) 207-3636.

David R. Evanson, a writer and consultant, is a principal of Financial Communications Associates in Ardmore, Pennsylvania.


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