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At a recent investment conference, Snapchat CEO Evan Spiegel was asked for his takeaway from his company’s recent initial public offering.
His answer had the room in stitches: “Don’t go public.”
Spiegel may have been half-joking. But his message got laughs because there’s an element of truth in it, known only to executives who have actually gone through the experience.
Going public remains one of the most attention-grabbing, if not misunderstood, processes in business. According to Renaissance Capital, a total of 190 companies went public in 2018, 30 more than the previous year, and proceeds from these initial public offerings (IPOs) reached $47 billion. The total for 2019 would have been even higher had WeWork not so publicly crashed and burned.
It’s hard to argue with results like that, and often companies have good reasons for turning to the public markets. But it’s not an easy road. A public company has more transparency to stakeholders and additional complexity, and is more scrutinized by the investing public and more expensive to keep compliant with regulators.
That’s partly what I learned on my own entrepreneurial journey recently when the bank I started and continue to run went public. I discovered how common it is for entrepreneurs to be blind-sided by how it works.
Sure, there’s plenty of advice out there — checklists, first-person accounts — all designed to make the decision seem like a clear-cut, well-trodden path. But here’s what most founders don’t know:
Make sure you know your ‘why’
Public-company CEOs have more difficult jobs. In order to want that added difficulty, you have to have a reason to take the leap. Maybe you need access to capital to support acquisitions and get bigger, or maybe you simply want to have better access to the debt and equity markets for financing later on. There are a lot of potentially good reasons to go public — you need to make sure one of them actually makes sense for you and your company.
Everybody is an expert except for you
From the investment bankers, to the lawyers, to your other advisers, everyone you work with on an IPO has likely done it a hundred times and knows exactly what to do to extract the most value for themselves out of the process. But for most entrepreneurs, it’s typically our first time. We go on the road show, we give the presentations, but when it comes time to price the offering, most of it is out of our hands.
Each adviser has multiple parties to answer to
The market is going to want to set that price as low as possible. Remember, the underwriters working on the deal also work for future investors, even though the company going public is the one that hired them. It’s a similar case with auditors and lawyers. The company is technically their client, but at the end of the day they have to answer to the Financial Accounting Standards Board, the Securities and Exchange Commission and their own professional standards.
That means they’re going to push the founder to stick to the well-worn path that they know will ensure success, even if it’s not always what might be best for the company. One small example: In our prospectus language, we were encouraged to use a common industry term, “branches,” that our company had specifically avoided. Were the words “local boutique banks” critical to our success as a public company? Probably not, but it reinforced to me that sometimes it’s important to push back on the experts when they’re asking you to change something for the sake of making their life easier, and in the process sanding off some of the edges that make your company unique.
That’s why it’s pivotal to look behind paid help for advice. Well before anyone goes public, they should seek out CEOs inside and beyond their industry who have made the change. Unbiased opinion is what you want — and that’s the fastest way to get it.
Prepare to own the process
Everybody says they’re going to drive the process — the investment bankers, lawyers and accountants all make that same claim. And at the end of the day, they don’t.
In our own path to an IPO, we encountered avoidable delays that we had to manage around, simply because we thought there was a chance that if we didn’t stay on our timeline things may not go so smoothly.
As it turns out, we were right. Not long after we went public, the IPO window in our industry got shut. No single factor led to that change, but it meant that had our team not pushed to stay on task, we might have missed our goal by assuming that somebody else we had hired to manage the process was actually doing so. Don’t make that same assumption — own the process.
There’s often no turning back
Once you’ve started, things quickly move out of your control and hitting the brakes or backing up become difficult, if not impossible.
Maybe you get two-thirds of the way through the process before you learn that your price range is going to be much lower than you expected. What do you do? You can try to shut it down and get out, but remember: This is a small world and the people who work on and buy into IPOs today will likely still be around a year or two from now if you want to come back and try again. The market may not be as receptive or interested a second time around.
Your role in the company is going to change
Many entrepreneurs go into the IPO process without thinking about what it will mean for them personally at the end of it all, and those are the leaders who end up being disappointed. Because the job does change.
You spend more time with institutional investors, working on regulatory filings and doing things that bear little resemblance to the work you did to build the company. Shareholders you’ve confided in throughout every step of the pre-IPO process? They’re no longer people you can talk to about anything. Everything you say to them about the company is now regulated. It’s not necessarily better or worse, but it’s certainly different.
And it’s certainly on the entrepreneur to do their own due diligence about the IPO process and learn as much as they can ahead of time. As long as you go in with realistic expectations, it can be a positive experience for all involved and set the business up for great things in the future.
The key is learning enough to have the right expectations. Hopefully this helps.
Scott C. Wylie is the chief executive officer of First Western Trust in Denver, which was one of the 190 IPOs in 2018.
