Last week, I sat down with IPO pro Lise Buyer to talk about the Bay Area ecosystem for a Sirius XM radio show that’s broadcast from Wharton’s San Francisco campus.
Buyer was the host and I was the guest, but because the IPO market is top of mind for so many in the startup industry right now, I asked if I could turn the table for a few minutes on Buyer, who is best known for helping to architect Google’s 2004 IPO and for the IPO advisory firm she founded in 2007, Class V Group. She shared whether she thinks the IPO market will pick up substantially next year, and what it takes right now to become a publicly traded company.
TC: We’ve seen eight IPOs in the last six weeks.
LB: After the first six months of the year, we’re on track to have a pretty average year in terms of IPOs; there’s momentum.
TC: But we’re heading into the final months of the year — an election year.
LB: I think IPOs are going to grind to a halt temporarily in November, even leading up to November, pretty much starting [this] week, because everyone is afraid of the election, and markets don’t like uncertainty, and whatever you think of the candidates, one of them is a little less predictable than the other. And should Donald Trump be elected president, I’d expect the markets to express some . . . I’ll be kind and say, wicked bad indigestion. And I don’t think anyone wants to take their company public in the middle of that.
TC: Do you think the companies that have gone out in recent months are solid? Do you expect their share prices to hold?
LB: Are these solid companies? Yes. Do I expect [their share prices] to say where they’re trading? We’ll see. A number of them did very small deals, and they did very small deals because no one was quite sure of how the market would be. So if you have a product to sell and you’re not sure of what kind of price you could get, [you start with little inventory].
Twilio did a $150 million IPO in June, and they recently announced a $450 million follow-on offering. When they announced that, their share price [fell]; then they announced that they’d had a terrific quarter, and the stock is recovering. It’s a supply-and-demand issue.
TC: When did we start to see these smaller floats, and is it something you recommend to clients? Is it a good trend, a bad trend?
LB: We’ve seen this periodically for years. It used to be that you sold 10 to 20 percent of your shares in an IPO but LinkedIn only sold 8 percent of its shares. Valuations are low, so companies are smart to take advantage of the [demand created from] limited supply. Also, why sell for a low price and take the incremental dilution? The best path is to prove the company can function effectively as a public company, and once investors are convinced that the risk isn’t that great and that the company understands the ramifications [of being publicly traded], do a higher-value secondary.
TC: Which you can do before a 180-day lock-up, correct?
LB: Investment banks have the ability to release the lock-up early. So you have to get your bank’s approval to do it, which basically means that you agree to use the same banks [that underwrote your IPO]. So we’ve seen them not infrequently after four months in those cases where the company has met expectations and its stock has performed well. If a company’s shares aren’t trading above its IPO price, you won’t see an early lock-up.
TC: What are bankers telling startups right now? Do they need to be profitable?
LB: A year ago, everyone was talking about growth. Growth, growth, growth, growth. Then, public investors said, “We care that these companies aren’t going to forever need to be taking new investments from private investors or even public investors. We want to see these are grown up companies that can stand on their own two feet and be profitable, or at least cash flow profitable.” So the pendulum swung in the opposite direction, and I think we’re swinging back a little bit now, to the point where investors are saying, “You don’t have to be profitable by Q4, but I want to see a real path to profitability because the private investor waterfall has dried up.”
TC: Everyone is dying for Uber to go public. Where do you think it would price today? It’s privately valued at $60 billion plus; investor Keith Rabois suggested six months ago that it could go out closer to $25 billion.
LB: I’m not going there, but when you have super-high profile companies, you get almost unlimited demand from [financially unsophisticated] investors. People want to buy it at any price. And sometimes that bids the stock way up on opening day, and sobering up is investors’ problem.
TC: How important is a Snap IPO for the current crop of unicorn companies? Everyone thought the floodgates would open after Facebook went out and that didn’t really happen.
LB: People often put too much emphasis on any one deal, and the world doesn’t work like that. The bigger impact is that we’ve had eight IPOs in September that were successful, which means that institutional investors are interested in new growth opportunities. Surely there are highly valued unicorns that will be watching what Snap does, but it’s a very small subset of candidates that looks like Snap.
TC: The presidential election takes place next month. What usually happens after an election?
LB: I do think the markets [get put on] hold until afterward. What really happens immediately after is you have Thanksgiving and Christmas, and while we might get a few more offerings between now and mid-December, it wouldn’t be surprising to see a number of public filings in January.
TC: A big number?
LB: No, not a huge number, because it’s not a short process, and if you didn’t start it by August at the latest, you aren’t going out in 2016 or early 2017.
TC: Speaking of numbers, how many companies are you helping prepare to go public right now?
LB: The goal is to work closely with about four companies per year, though timing is always challenging because companies think they’ll be out in nine months, and nine months sometimes turns into a two-year deal. Our goal is to be a McKinsey, meaning smaller and elite, opposed to the larger accounting firms that work with many more customers. So there are no junior people on staff. Leslie [Pfrang, a former managing director at Deutsche Bank Securities] and I are selling our frontline experience gained over the last 20 years.
TC: How many companies are taking advantage of confidential filings? All of them?
LB: Almost everyone who can [because there are size limitations]. That’s perhaps a positive from the JOBS Act; companies that are uncertain about markets can get the ball rolling without getting their numbers out in front of the competitors. The downside is your employees don’t know until 15 days before [a company’s roadshow], and that leaves employees almost no time to do personal financial planning. Confidential filings also give institutions less time to do research unless it’s a company like Airbnb where there’s plenty [in the public record] to research.
TC: Before we wrap this up, what are the handful of things you absolutely need to go public in this market?
LB: You need to be able to forecast your financial results; you can get out otherwise, but it won’t look pretty three to six months later.
You need to have your team in place. If the team is in flux, it just makes things that much more challenging. It’s not uncommon to see CFOs change within the year, but that’s far from ideal. And certainly, the CEO and head of sales should have been there for a year. You’re in a much stronger position if your team has been there for a year or more.
Be able to tell you story in a succinct way that will appeal to investors. So many management teams are excited about their technology that they forget to talk about how the application of that technology that will generate P&L over time.
Be able to tell a credible story about how your numbers will improve over time. People who make their operating margins look their very best at the IPO only have one direction to go.
Convey to investors that you’re attacking a very large market. Otherwise, they’re going to wonder why you’re going public and not an acquisition target.