Preparing for IPO starts now – even if you don’t go public for years to come
Your entire team is gathered around a podium. The rest of the company is crowded into meeting rooms and event spaces around the globe. Everyone’s eyes are the live stream as together you count down to one of the most exciting ScaleUp milestones the company has navigated in recent years. Five, four, three, two, one… the streamers explode over the crowd and every employee, investor, and partner of the company cheers in celebration. You are now a public company – you’ve successfully executed an Initial Public Offering.
If you’ve been through an IPO as an entrepreneur, executive, or employee this scene brings back indescribable feelings of pride, fulfillment, and a touch of exhaustion. If you have not, but you work in a software company you’ve probably dreamt about the moment.
Often, we are focused on the moment of the IPO and don’t take stock of the path to get there or calibrate the hard work that underpins the ‘day of’ celebration.
The ScaleUp software companies that Insight Partners invests in are businesses that have product-market fit and are focused on operational excellence to generate rapid, and sustainable growth. There is a shift leaders need to make as their startup graduates to becoming a ScaleUp – a recognition that strong business fundamentals and metrics are critical to building a company that can survive scaling at triple-digit growth and is in a position, when the time comes to go public, to hold up to public investor scrutiny.
When you become a public company the disclosure requirements, investor communication programs and quarterly earnings calls require business and operational rigor since maintaining investor confidence as a public company rests on growth, predictability, and consistency.
Despite the excitement of the IPO day, building up to an IPO is simply building, brick by brick, a strong and sustainable business. That’s what we focus on at Insight, building really strong businesses. This gives you options: whether you decide to stay private longer with our continued support, or move towards an IPO, the outcome is the same! You’re in a strong position.
What type of business is a good IPO candidate?
- You’ve got a large TAM. As Insight Managing Director Teddie Wardi, investor and Board Member of newly-minted public company SentinelOne notes, “public companies must address a market large enough to support many years of continued growth. Whether that be growth through geographical or product expansion, your investors will expect consistent growth so you want to make sure that market is available for you to chase.”
- You have a strong competitive advantage. There is a reason successful companies spend years focused on product excellence or driving a durable edge that sets them apart from the competition. When you go public you want that moat to be wide enough and defensible enough to prove to investors that you have what it takes to remain a sought-after business by customers and investors alike.
- You have consistent high growth, and at scale! Investors are typically looking for over $100M in ARR with a track record of 40%+ growth over several years. Best-in-class companies have an annual NRR of >120%. There’s a reason Insight invests not only capital but also operational support in our portfolio of ScaleUps, because we know if an IPO is on the horizon, it takes go-to-market and operating excellence. Hiding underneath “high growth” is the fact that new customers love your product, existing customers are expanding their use of your products, and that both of these things are happening at a faster pace than customer churn. A focus on these business metrics is really a focus on whether or not you have efficient customer acquisition unit economics.
- You have a clear path to profitability. By focusing on unit economics at scale you’re painting a clear picture to your investors that your cash usage is directed at efficient growth that over time can generate profits. Most tech companies are not yet profitable when they go public because their strategy of delivering quarter after quarter of high growth requires significant investment in customer acquisition. Public investors can find comfort in this strategy if there has been a strong track record of past performance, and the lifetime value of customers (net retention for SaaS companies) is solid.
- You have an exceptional team ready to take on the challenge of an IPO and being a public company! To IPO you need an all-star team at the helm of each of your functional areas within the business some of whom already have experience navigating the IPO process and delivering against public market expectations. A visionary founder or CEO paired with a CMO with communications expertise is critical to communicating the company’s history and selling the vision of the business. While an IPO is a financing event for sure, it is importantly a major marketing event for your business; companies who endure are able to articulate their story continuously, consistently, and with the type of conviction needed to stand out from the pack.
“Ok, I think my business is well-positioned to go public, what do I need to be IPO ready?”
At Insight, we run a full exit prep program to help ensure our late-stage ScaleUps are set up for success throughout the IPO. Often this work will begin in earnest up to two years before a company executes its listing.
Here are a few items to ensure are checked off before going public:
- You have documented a clear strategic roadmap that will be used as a foundation for the company story and registration filing. To learn more about building a well-articulated strategy in the market, we recommend that you watch our webinar, "Be in the Room Where it Happens: CMO's Role in IPO."
- You’ve executed several quarters of accurate and consistent financial revenue and cost reporting. Missed quarters can have a sizeable impact on a public company’s valuation so accuracy is critical.
- You have your audit and reporting processes set. This is often cited as one of the biggest surprises of public company executives – “I knew there would be increased compliance and reporting requirements, but I didn’t realize quite how much extra time this would take.” Set up the team and process well ahead of going public so that you have a well-oiled function in place before the first due date.
- Your “leading indicator” metrics are solid and you know which metrics you’ll cite quarter after quarter to provide a window into the health of your business, and the predictability of future growth.
- Your firm-wide policies – including HR and communications policies and procedures – are set up and operationalized. This includes the ability to recruit and retain talent at scale.
- You have proper governance in place. A strong board of directors is a valuable asset to any company – private or public – but as a public company, there are specific criteria to meet (e.g., audit chair, independence, women, and people of color in some states and countries). Most companies spend the year leading up to an IPO strengthening their board in preparation for life as a public company. Bringing on board members with diverse perspectives and skills, as well as people who have been through an IPO before or served on public company boards is invaluable. A shift for many private companies is that their board needs to be made up of predominantly independent members – so some of your long-standing investors and friends will need to transition off.
There are many more best practices to think about as the IPO date approaches. What we focus on at Insight is laying the right foundation for a strong, enduring, and sustainable high-growth business. Whether you decide to go public or remain private longer, everything outlined here sets your business up for success.