In 2013 246 companies in North America went public — a 42 percent increase over the previous year. And if the recent rash of filings with intent to go public continues, we could be looking at another increase this year.
Going public is a big step for a software company. Preparing for an initial public offering (IPO) is a challenging task and requires exceptional financial management and governance. Potential investors, auditors and underwriters evaluate a candidate’s reporting capabilities, IT systems and compliance, as well as its overall business prospects to determine its outlook. This is true for any growing company that may be looking for outside investment, be it in the form of an IPO, acquisition or private investment.
Preparing for the initial public offering was the topic of a recent webinar I hosted, “Preparing for IPO: Streaming Compliance in the Cloud.” The webinar featured a panel of executives who have taken multiple companies public: Cory Douglas, CFO at Medidata Solutions; Steve Hobbs, managing director and head of public company transformation at Protiviti; and Dan Miller, VP of finance and general manager of the software vertical at NetSuite.
Moving from a privately held to publicly traded company has numerous implications for a business, but our panel of experts opted to focus on six areas that are the most critical.
- The financial close: It all begins with the close. In order to meet SEC filing requirements, the organization must have a consistent cadence for timely and accurate closing of the books on a monthly, quarterly and annual basis. Investing in this process well in advance of talks about bankers and road shows is critical.
Closing the books as if you already are a public company is the only way to determine where your gaps are and what you need to fill them. The bottom line is that you have to be able to get to the right answers on a timely basis, which means you’ll need to wean yourself off manual processes and spreadsheets.
- Financial reporting and forecasting: Application of relevant accounting principles, the ability to make key judgments and estimates and knowledge of SEC reporting are critical. But it’s not just about today’s numbers; the ability to accurately forecast in a timely manner needs to be heightened as well.
Establishing granularity in financial data will be necessary to support your forecasting efforts. You’ll need to take GAAP and non-GAAP reporting into account and determine the metrics that are the most critical to your business — both the ones you will report to the street and the ones you will use internally to run the business.
- Corporate governance and SOX compliance: Ongoing compliance with SOX and industry regulations is imperative to any public company. The onus is on the CFO to establish a robust and efficient internal control environment. In reality, the minute you say you are going public, you are public. And this means your S1 will also be your first audit. Executive management and the board must establish and maintain strong communication and governance practices.
- Financial system readiness:Reviewing the financial and operations systems environment is necessary to ensure it’s ready to handle the demands of operating in the public sphere. In the past organizations were forced to spend heavily on a “big iron” financials package; today cloud-based applications are the primary choice for rapid-growth organizations that are hitting the public market.
Cory’s story of the Medidata Solutions journey was particularly enlightening as he expanded beyond the topic of finance and accounting and into other areas of the business such as operations and professional services, describing the importance of those inputs as well.
- Organizational capabilities: At some point you will have to consider upgrading the finance team to include individuals with experience in SEC reporting, SOX, internal audit and GAAP. Look to bring people on board who will have the respect of your auditors and, at the same time, look at your existing staff and determine who has the ability to grow and take on additional responsibilities.
- Preparing the registration statement: An important step in the IPO process, the registration statement, has the ability to distract the organization. Communication to employees about the process and the impacts to them, along with proper program management, can help minimize this distraction. Steve Hobbs, who has advised hundreds of companies on going public, shared example timelines, prioritization heat maps and action plans that can assist organizations on this journey.
A common theme from each of the speakers was that it is never too early to begin preparing for the rigors of operating as a public company. Something else to consider is that both private equity and venture investors expect to see discipline in the above areas as a private company looks to secure later, and larger rounds of funding.
And if you are hoping your tech company will be acquired by the likes of Oracle, Google or another large technology company, then to get through the due diligence, you will also need a more rigorous approach to managing your back office than you did when you launched your startup.
Executives at private companies who either have plans for an IPO in the future, or are looking to secure a final, large round of funding or are hoping to be acquired by a public company can all benefit from viewing the webinar recording for detailed best practices in each of these six critical areas.
Kimberly Odom is director of vertical marketing – software industry at NetSuite. She has 15+ years’ experience in enterprise applications including ERP, CRM, multichannel customer service and marketing automation. Prior to NetSuite she worked at Contactual, a SaaS provider of customer interaction management solutions, where she was responsible for development and execution of the company’s marketing strategy. Her background includes roles in product marketing, product management and channel sales with startup, midmarket and Fortune 500 companies.