“The IPO Playbook” (Book Review)

Steve Cakebread is a CFO with a lot of experience in leading companies to Initial Public Offering (IPO). In his earlier career Cakebread worked at Autodesk, Silicon Graphics and Hewlett-Packard, after which he was involved in three successful IPOs, at Salesforce, Pandora and Yext respectively. In “The IPO Playbook” Cakebread shares his lessons learned and tips with respect to both considering and implementing an IPO. The first question that he raises in the IPO Playbook is a pretty fundamental one: why would a company consider going public? Cakebread lists six big reasons for creating an IPO:

  1. Build a company that’s recognised – Cakebread argues that there’s a distinct difference between a company that’s sold and building a company that endures and thrives.
  2. Share success – Going public is the best way to reward all of your loyal stakeholders: investors, employees, and even your community. Sharing the success of a growing company is part of the journey, and great founders recognise that others contributed to the team and helped the business flourish over time.
  3. Become known globally – “Internationally, as a private company you remain largely unknown – and unproven.” Cakebread writes that being listed on the NYSE or NASDAQ legitimises you in the eyes of the world. He explains that a listing helps to create the perception that the company is a safe buy, a viable enterprise and has real staying power.
  4. Founder appreciation – Listing a company helps in generating more founder appreciation, which in turn creates more opportunities to to invent and contribute or become a founder once again. In contrast, when a founder sells the business to a bigger company, the founder inevitably leaves the acquiring company.
  5. Discipline for the future – Interestingly, Cakebread mentions that companies going through the IPO process are often surprised that the very act of putting auditing systems in place, developing the messaging and documentation in the prospectus, streamlining the organisation, and answering questions in roadshows is a very useful disciplining process. He points out that growing a successful public company requires systems, fair workforce compensation, administration, processes, etc. Arguably, such a process of ‘maturing’ as a company is good for any business, whether it ends up going public or not.
  6. Rationalise valuation – Private companies never really know their actual worth in the marketplace. Because an IPO is the subject of considerable outside analysis and carefully prepared financial tables, sets a real value on the company and stabilises that valuation over time.

Following the decision to go public, doing an extensive ‘assessment’ is the next step. The assessment process is critical in positioning a company for going public. A company will be assessing their teams (e.g. sales, legal and finance), the flow of information (e.g. the state of information systems like CRM, finance and payroll) and the company culture. With the latter aspect, the focus is on the ability of a management team to grow and change as well as its ability to bring in new leadership talent into the company.

Image Credit: https://www.yext.co.uk/about/leadership/steve-cakebread/

‘Systems’ form another important area to consider when going public. “While picking the team to take your company public is critical, choosing the corporate information management system to support that team is a crucial decision, and the one that will have lasting implications for your company” explains Cakebread. He lists a number of core systems in this regard:

  • General Ledger – A General Ledger is a company’s record-keeping system for its financial data. It contains a record of each financial transaction conducted by the company as well as the account information needed to prepare a company’s financial statements.
  • Billing System – The Billing System should at a minimum capture accounts receivable information (by customer and invoice), customer invoicing and integration with a quoting solution.
  • Human Resources Management System – With an HR system, ease of use and obvious workflow are crucial aspects given that a company’s entire workforce – present and future -needs to interact with it.

Naturally, the book offers insights into the process of determining a company’s valuation, and working with researchers and bankers in the process. For example, the investment bankers that will create your listing will come armed with a number of techniques to “estimate the potential value” of the company, typically by comparing the company that’s looking to go public to businesses that might relate.

To prepare for this exercise, Cakebread recommends that companies start putting together their own list of public and non-public companies with which they compare themselves. This list should be based upon a shared business model or a common industry in which you compete.

Once you’ve established your peer group, you can get a better understanding of how your company is the same and how it’s different from your peers. You can do this comparison by looking at metrics like these:

  • Revenue
  • Revenue growth rates
  • Sales and marketing as a percentage of revenue
  • Product development as a percentage of revenue
  • Gross margins
  • Revenue per head
  • Operating margins
  • Cash flow per share

Finally, Cakebread stresses that a new journey only begins after a company has gone public. Rather than treating IPO day as the finish line, the journey only starts here. Going public can be an amazing milestone, but also the starting point of new changes to the business; changes in the people org, operations, financial reporting, etc. These are the critical factors that businesses must continue to focus on – and in some cases accelerate – after going public:

  • Running the business
  • Forecasting current and future results
  • Managing your cash
  • Hiring, hiring, and hiring
  • Educating new shareholders
  • Dealing with the SEC

At a first glance, you might look at these focus areas and think “what’s the fuss about. my business is doing most of these things already!” The main difference, Cakebread explains, is that a company is subject to new, different rules and expectations once it goes public. For example, metrics that might not have felt relevant at the early stages of the business, now become an important guide for the (new) shareholders as the business scales. In other words, the IPO is ultimately another milestone in a company’s evolution.

Main learning point: “The IPO Playbook” is a good guide for anyone considering an IPO, being involved in one or just interested in learning about going public. In the book, Steve Cakebread shines a light on the pros and cons of companies going public and offers tactical advice for those business that do decide to IPO.

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