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It was only a matter of time before the digital revolution andthe Internet took aim at the photo processing market. After all,according to Andy Grove, one of the founders of Intel Corp., anyinformation 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 PictureVisionInc., co-founded by Phil Garfinkle, Yaacov Ben-Yaacov and ElliotJaffe. The trio met through a joint venture between an Americancompany where Garfinkle was employed and an Israeli technologycompany Jaffe and Ben-Yaacov worked for. With PictureVisiontechnology, consumers can share, manipulate and store photographson the Internet.
To develop and roll out this kind of service takes capital, andplenty of it. The sheer excitement and size of PictureVision'smarket made the always-difficult task of raising money to fund thebusiness somewhat easier. Since opening its doors in late 1995,PictureVision has raised $9.3 million, with more deals in thepipeline.
Very early on, the partners knew PictureVision was on an initialpublic offering (IPO) track, says Garfinkle, whose previousposition was with a public company. "An IPO is the only way wecan access the volume of capital we need," he says, addingthat outside of an outright acquisition, an IPO would be the onlyway 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 amajor-league debut.
Unfortunately, according to Glenn Bierman, founder and chairmanof Tycon Equity Partners LLC in New York City, companies sometimesfail to bring their offering to fruition simply through lack ofproper planning. Bierman should know: As an investor in manyearly-stage companies, his company's ultimate return depends onthe ability of the companies it invests in to go public. "Oneof the most important strengths we bring to the table is helpingcompanies structure and present themselves in a way that will beattractive to the capital markets," Bierman says.
What follows, according to Garfinkle and Bierman, are strategiesand tactics entrepreneurs must consider now if they thinkthere's an IPO in their future.
- Break out of the box. It goes (almost) without sayingthat every company looking toward an IPO must build a strongmanagement team. And if you are dead serious about building thekind of company that investors will stake millions on, saysGarfinkle, you've got to be willing to hire outside of your ownnetwork.
For many emerging growth companies, Bierman says, anunderwriter's decision about whether to do a deal hinges on theteam they'll be turning the capital over to once it'sraised. "Ideally, you want a team with lots of industryexperience that can walk into a room and take command of it,"says Bierman. In most cases, the reasoning goes, those names arenot lurking in a small-business owner's Rolodex.
For Garfinkle, finding this kind of talent meant retainingprofessional search firms to fill key posts in marketing andexecutive management. If you don't have the funds for a searchfirm, running ads in national trade publications is another goodway to find employees who can bring new thinking to the table.
- Enlist top-flight accountants. According to Bierman, thebest accountants for companies considering an IPO come from theso-called Big Six firms. "The reason is simple," saysBierman. "When you're ready to go public, you want toinstill confidence in investors, and by and large, investorsuniversally trust the Big Six." Moreover, he adds, whileregional or local firms may have the same skills and talent theirlarger bean-counting brethren do, IPOs are generally soldnationwide, and only the Big Six have national namerecognition.
Perception aside, there are several technical aspects offinancial accounting that must be addressed early on. For instance,issues such as how to recognize revenue, whether to keep books on acash or accrual basis, and whether to record investments inresearch and development as an asset or an expense are policiesthat will be scrutinized when a company files to go public."If these are not right from the start, it causesdelays," says Bierman. "And nothing kills an IPO morequickly than unexpected delays in the process."
- Build a board. Investors want to see a board ofdirectors that will help a newly public company make sounddecisions. As a private company, you can build a board of directorsin which you have confidence. Garfinkle says that entrepreneursmust also build a board of directors that has confidence in you andcan help maximize the company's value for the publicshareholders. PictureVision is now bringing in board members who,while outsiders to the company, have broad-based industryexperience in photography, the Internet andtelecommunications.
"For companies on an initial public offering track, theboard's relationship with the founders becomes a two-waystreet," says Bierman. "Not only do the founders have tobe comfortable with the board, but the board must be comfortablewith the founders since collectively, the board will be accountableto public investors for what senior management is doing with thecompany."
- Grow up. Tiny or early-stage companies tend to enterinto relationships on a handshake and a hope. Operationally, thismay work out fine, but it won't survive the scrutiny of an IPO."You might work out deals where some customers get certainbenefits that others do not," says Garfinkle."Unfortunately, what the underwriters and the attorneys wantto see are standardized procedures and contracts so that everyoneis equally protected."
This idea extends beyond agreements with suppliers and vendorsand, ideally, applies to virtually every aspect of thecompany's life. Independent contractors, for example, are mostoften converted to employees because this gives the employer morecontrol and less chance of problems with the IRS. And rather thantelling employees to sink or swim, performance reviews becomestandard operating procedure. Patents and trademarks, rather thansimply being discussed, are applied for and vigorouslyprotected.
- Set up benefit plans. Most high-octane companies run onpeople. But you can't possibly hope to attract the strongtalent you need without a benefit plan. Of these, the mostimportant is an employee stock option plan. "As a growthcompany, you might not be able to match the salaries offered bymore established ones," says Garfinkle, "but you canbridge the gap by offering potential employees the opportunity tocash 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 companyneeds to recruit. "Many times the senior management that werecruit for companies have had prior successes, so they aren'tlooking for the big salary as much as they are the large upsidepotential that can come with options or other forms of equityparticipation."
- Build bridges to the financial community. AsPictureVision has grown over the past several years, Garfinkle hasspent more and more time networking with members of the financialcommunity. "I've been working with investment banks andtheir analysts," he says. "Believe it or not, many of ourpotential customers call these analysts to find out about us. Inaddition, though our transaction may be down the road and wehaven't yet selected our investment banker, we can use thistime to figure out who the best partner is forPictureVision."
But there's more. Bierman says the other piece of the puzzleis that analysts and investment bankers can give you feedback onbusiness models. "A lot of analysts help you wear binocularsby 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 thesenior-level investors who are interested in your particular kindof company. But ultimately, to make money, investment bankers mustdo transactions, which means they're always looking forprospective candidates. The entrepreneur's task is to convincethe investment banker his or her company can go the distance andthat it's worth their time to develop a relationship.
- Hire good help. Some of the most challenging aspects ofpreparing for an IPO relate to personnel, says Garfinkle. Themigration from a start-up to a high-growth enterprise means thatentrepreneurs must constantly realign personnel into more narrowlydefined responsibilities. "That's a significantchallenge," Garfinkle says. "My advice: If you can affordto, hire to meet the needs of the business you anticipategenerating, not the business you're currentlygenerating."
Contact Sources
PictureVision Inc., 250-A Exchange Pl., Herndon, VA20170, (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 ofFinancial Communications Associates in Ardmore, Pennsylvania.
