Many companies would like to believe they are ready to go public. However, momentum and fast growth are drivers that often get prioritized over preparedness and viability.
It’s easy to succumb to the excitement of an IPO. But CFOs have to ask some hard questions, such as: Is there predictability in the business? And do I have the ability to forecast my business?
If you don’t have predictability and you don’t have the ability to forecast, there’s only one answer: you’re not ready to go public. That doesn’t mean you can’t be ready in the near future. But there are serious considerations to manage and crucial steps to take if you want to prepare for what an IPO actually requires.
Act Public Long Before You Go Public
One of the best ways to assess readiness is to act like you’re running a public company before it becomes one. That means determining how you would guide the business and hold yourself accountable—not just to your board of directors but also to public and institutional investors, government and financial regulators, and the many other new stakeholders a public company attracts.
First and foremost, you need to see how accurate your forecasting is. I recommend providing guidance to your board for a minimum of three quarters. The goal is to forecast within a small range of the outcome.
Missing by 10-15% is obviously substandard, but it’s equally bad to beat your forecast by 10-15%. No one will believe the guidance you’re giving if you misjudge to such a large extent in either direction.
Chances are, you’ll need to refine your forecasting multiple times and over multiple quarters before you reach a level of predictability. Refinement requires more than a focus on the numbers. It’s equally important to invest in strategies that will help you scale as a fast-growth company.
- Establish processes that build communication and trust between different business functions. The ability to predict your business and forecast with accuracy is predicated on cross-functional communication. For example, the Finance team should have a tight relationship with Sales in order to understand how customers will consume an offering. When the Financial Planning & Analysis (FP&A) team shares financial trends for the top 50 accounts, they can receive direct feedback from Sales to answer the question, “Based on what you’re seeing with customers, does this forecast make sense?” Similarly, Engineering should share information with Finance about upcoming features designed to streamline customer usage. Any feature that intentionally reduces your customers’ product consumption may be good for business in the long term but may also lower revenue in the short term, which requires forecast adjustments.
- Deliver one budget. Too many companies set budgets only to have departments spend money however they want because they believe it’s their budget. Wrong. I’m a firm believer in one budget where the entire company is aligned around programs and initiatives. Money is allocated for a purpose, and CFOs should make certain that all spend matches its purpose and teams use it efficiently.
- Pursue renewal opportunities with customers who are consuming faster. Sales cannot be focused purely on new business. It’s important to go after renewal opportunities within your current customer base for those with high usage and strong engagement. This capability is tied to the ability to predict and forecast business, so you must have processes in place to support it.
Systems and Automation Speak to IPO Readiness
Frequently, companies scale for growth by focusing on revenue and ignoring internal systems. That’s a big mistake. When scaling for an IPO, you must invest in backend systems and inject automation into everything you do. While not necessarily impactful for sales, systems ensure you can report accurately as a public company.
From a CFO perspective, a strong ERP system is a must. The speed at which you can close on a monthly basis is a paramount concern for every public company, and you want the entire financial close to be as automated as possible in order to reduce errors. Additionally, your billing system must be able to scale with your organization, especially if you have a consumption-based business model.
Most importantly, real-time data is required to make real-time decisions. You must have access to accurate, fast data so you can course-correct within a quarter. The last thing you want is to find out at the end of the quarter that you’re trending above or below your spending or revenue. By then, it’s too late to make adjustments.
Here are three pieces of advice when it comes to systems:
- Less is more. Standardize on a limited number of SaaS products as your core systems and make sure they work together seamlessly. Use point solutions only if they are orders of magnitude better than the platforms you chose. Avoid the “shiny object” syndrome where you bring in different technologies because they have cool features. It’s costly to introduce additional systems into your environment because they broaden your SOC 2 compliance scope and add work for auditors.
- Select for the long-term. Never put a system in place unless it’s going to be relevant for at least five years. Thankfully, the SaaS world makes upgrades much easier. There’s no reason why a cloud-based ERP system can’t be with you for 20 years, assuming the provider continues to invest and innovate in its product roadmap.
- Evaluate at regular intervals. Every few years, take a hard look at all systems. Determine whether or not a newer system now exists that does something in an innovative way or represents a better fit for your evolving system requirements.
Invest in the Right People and Find Your Quarterback
Scaling a high-growth company means hiring employees for where the company is heading rather than where it is today. You’ll also want employees whom your leadership team can trust because delegation is a necessity of growth. Personally, I care a lot less about what a person has done and more about whether I see high potential, drive, and the ability to grow into the job.
Additionally, I look for people who have a lot of experience with coaching and mentoring. It sounds counterintuitive, but those who are good at helping others develop their careers will not be missed when they leave the company. They will have enabled their people to solve problems and make decisions on their own. Coaches and mentors uplift the entire organization and aid in the development of stronger employees.
To ensure a successful transition from a private to a public company, it’s important to help your employees shift their mindsets towards the reality of real deadlines. For finance teams, monthly and quarterly closes will have much more process around them, and you must meet tight reporting deadlines. Discipline is a necessity.
People often believe an IPO is difficult to achieve from a regulation perspective but that’s a big misconception. Going public is actually quite easy. It does take time and requires a lot of tedious work to meet the legal requirements, but it’s not hard. What’s most important is that you have a quarterback running the show—someone who aligns cross-functional teams and drives the timeline to ensure you don’t fall behind.
With any IPO, you must have complete alignment between Finance and Legal. The same goes for Product Management, which tends to be involved heavily for its product knowledge and roadmap expertise. Communication, alignment, and trust all come into play but that quarterback position is critical for keeping everything on track.
How Big is Your Company? How Big is Your Market?
Let’s face it: a lot of companies should never go public. Either they are better off as acquisition candidates or should remain SMBs. The key is to understand how big of a market opportunity you’re chasing and what’s the problem you’re trying to solve. Does it really make sense to go public if you’re truly a point solution and never going to get above a couple hundred million in revenue?
For those considering an IPO, it’s important to ask yourself a lot of questions, especially around why you want to go public and whether the company is ready for the scrutiny. (Because, once you’re a public company, you will be scrutinized.) Here’s a handful of questions to consider:
- Do you need to make big investments? If so, are they best made as a private company or as a public company?
- Do you have confidence in your ability to scale the company?
- Are you on the path to profitability?
- Beyond revenue growth, can you show leverage in the business?
- Is there an investor appetite for companies such as yours?
The decision to IPO should never be taken lightly but it can be extremely rewarding if you are truly ready for all that it entails. It’s about keeping your eye on the ball and knowing where it’s meant to go—not where you may believe, or want, that ball to go.