It’s been an active four quarters for technology IPOs. If you rewind the clock to Q4 2020, we’ve seen megawatt public debuts from tech shops of all sorts. Airbnb recovered from COVID-19-induced lows to list, while Roblox delayed its IPO and went out with a direct listing. DoorDash went public. C3.ai had an explosive offering late last year as well.
Things have largely continued in 2021, with IPOs throughout the first and second quarters leading to debuts from Freshworks, Toast and, most recently, filings from GitLab, Rent the Runway, NerdWallet and others.
Many startup founders aspire to an IPO, even if the average time horizon for the liquidity event has now stretched as capital flows into the private tech market. But how to get a company ready for an IPO isn’t normal fare in startup conversations — it’s a bit like talking about your 21st birthday when you are in middle school. Sure, it’s a thing that will happen someday, but not much of a pressing concern.
You’d think so, at least. The prep process for going public is actually somewhat long if done well, and startups might need to get started with prepping their operations for the public markets earlier than they think. It’s a topic that we explored during TechCrunch Disrupt 2021, where I hosted a conversation with Lux Capital Partner Deena Shakir, Madrona Managing Director Hope Cochran, and CrowdStrike CFO Burt Podbere.
The entire discussion is embedded below, but I’ve pulled out a few key moments for those of you who are more reading-based learners than video-watchers. Topics follow by subheadline, with the video at the bottom. Enjoy!
You can prep too early
Heading into the conversation, I expected to encounter three folks all nodding their heads sagely, intoning in unison that startups can’t really start IPO prep too early. That was not what I wound up hearing. Cochran said this, following my question about how early a startup should start prep for its public debut:
You hear many people talk about, “Oh, you need to start thinking about going public really, really early” and building that rigor. I’m actually more on the camp of: “Let’s let the company run and be agile for a while and put in processes as they’re needed.” You will get there in the appropriate amount of time.
A good example (and I’m gonna be super nerdy, OK): I think of the [purchase order or PO] process. What’s a PO process? A PO process is saying, “I’m making a commitment to buy some things.” It adds a level of friction in the ability to buy things. You definitely need it for internal controls when you go public. But if you put it in too early, you’re slowing down the whole [business] process.
So, you want to put it in, in that moment when you’re big enough that as the CFO, you all of a sudden realize you don’t know everything’s been purchased, and you need a tool to help you [handle purchases]. That is how I make my decisions [concerning] when I put a process in place. How do I make sure my financials are accurate? How do I make sure the company is running appropriately?
One of the things that I wanted to insert earlier about going public is … there is a benefit in being public in the sense that it does institute and accompany accountability and rigor. That [going public] does enable a company to run more efficiently. Now there’s a bunch of overhead with being public, which is painful and hard, but it does make [a] company grow up a little bit and really make it run with a bit more accountability [to] get the forecasting accurate. You also get a little bit more control within the organization, which sometimes is a little bit more loosey-goosey, just to use that word in the private area.
Podbere also weighed in on the friction versus process point, in case you want more on the matter. And for what it’s worth, Cochran said “loosey-goosey” as an echo of a prior comment of mine from the panel. I don’t think that the former CFO often says “loosey-goosey,” a phrase that has been banned in accounting circles since 1284.
https://www.youtube.com/watch?v=o-5rg-ckYnU
Do SPACs affect when startups should prep for going public?
Given that we’ve seen a great number of tech startups go public via a SPAC this year, or special purpose acquisition company, do they need to start prepping sooner?
Shakir echoed Cochran’s earlier argument about getting ready too early, even in a SPAC context, by saying that you could wind up “limiting the growth of your company [which is what will] make you an attractive public company down the road. And so there is sort of a fine balance to be had there. It can’t be ignored, but it shouldn’t be optimized for on day one.”
So, what to do? Cochran gave some concrete advice: “One of the things that I would have all my companies do fairly early, maybe starting with a Series B, if we use that phrasing, is [to get their] financials audited.”
That may be the real first step, then, to getting ready for an IPO. The audit process will not be fun, but it could help turn over stones that needed rotation, helping a startup find the hidden roaches before they can nest and reproduce. And that matters if you are going to direct list, pursue a traditional IPO or launch into the public market with a SPAC.
Putting together a checklist
Wrapping up our textual overview, we turn to Podbere discussing how a CEO may want to approach the prep process after one chats with both their lawyers and accountants:
Write a checklist or one-pager [saying] these are the things we really need to have. [How] many quarters in a row can you forecast within 5% or 10% on top and 2% on the bottom, as well as like how fast you can close the books, which is not a financial metric; it’s just a process metric. So you carve out a couple of buckets, you nail those, and [it will] give you a sense of whether or not you can go to that next level where you got to go drill down a little deeper.
Sure, there’s a lot to do to get ready to go public, but it’s better to do the work than to file and have to skulk backward and yank the filing.
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