The first quarter of 2014 has experienced the largest number of IPOs in the past decade, compared to first quarter data from previous years. With the JOBS Act in place and an improved economy, the accelerated pace is not expected to slow down.
If you are building a company today, you may want to consider whether or not an IPO is right for your company. Keep in mind; the average duration from first financing round to IPO is 7 years.
Here is a quick guideline to assist with your planning:
1. Preparation Phase – six to twelve months
During this stage, you want to hire a CFO with IPO experience. In fact, of the 37 companies that have filed public offerings in 2014, nearly 54% hired a CFO with experience bringing private companies public.
Your battle tested CFO will be instrumental in updating your financial reporting to conform to Sarbanes Oxley and crafting the financial section of your S-1, the formal document that is filed with the Securities Exchange Commission (SEC).
The selection of a lead underwriter and, if needed, accounting firm should be completed by this stage.
2. Organizational Meeting – one to five days
Your organizational meeting may be brief if all parties can agree on the terms of the offering and the timeline for the IPO. It is wise to use your preparation phase to get your management team, investors, and board to reach a consensus.
3. File S-1 –three to four months to draft and one to two months for (SEC) approval
Most early-stage companies are allowed to file confidentially as an ‘emerging growth company’ under the JOBS Act, which allows the company to receive their first review from the SEC prior to disclosing the filing publicly. The main criteria for a confidential filing is: 1) revenue of less than $1 billion in the last fiscal year, and 2) no sales of common equity prior to December 8, 2011.
Your company should be prepared to review and respond to all SEC comments over the next few months. This is where having an experienced CFO will aid the process.
4. Road Show – two weeks
Once your company has obtained FINRA clearance you are ready to conduct nationwide presentations to showcase your investment opportunity. This is managed by your underwriters, but you should expect your time to be on hand to meet with investors.
The most important element of preparing for an IPO is recruiting the right people. You can begin that process today. Ensure the staff you bring on today has what it takes to be part of a high growth team
If you are doing anything worthwhile, you will have critics. Learn to discern between those providing valuable feedback on your product or service and those who simply have too much time on their hands and a sour attitude.
When you encounter valuable feedback, determine whether you should implement the suggestions. Andy Grove, former Intel CEO, is candid in explaining one of his major mistakes running Intel was refusing to listen when customers discovered a flaw in the Pentium’s floating point unit. He countered the criticism with a public letter to customers explaining that the part was not flawed. This strategy backfired and he was later required to replace the product. The product was indeed flawed.
Tip: Admit when you are wrong and resolve any and all legitimate issues immediately. Don’t fight the truth.
Swift action is also in order when the negative feedback is not valid. The best way to handle negative reviews or comments is to politely and quickly set the record straight.
If the negative review comes in the form of a lawsuit, you may want to follow Taco Bell’s lead and get right in front of the problem. Not only did they set the record straight about their product; they launched an advertising campaign. The advertising campaign brought more attention to their brand and the lawsuit was soon dropped. The brand struggled to regain its footing in the following months, but eventually recovered. Today, Taco Bell is on top of their game.
Tip: Don’t allow negative sentiment around your brand to brew. Put out fires before you get burned.
Fortunately, building a company is not always about putting out fires. Most of your time will be spent building relationships with your target audience, including your current users or customers.
Make sure your customers know they are being heard. Provide a method of communication that allows them direct access to you. Seek out their feedback and implement changes when appropriate.
Many entrepreneurs worry that they don’t have time to manage communications with their customers. Remember: your customer is the lifeline of your brand and their feedback is gold. When you learn to value your customers, your customers will value you.
The time and money you spend communicating with your target audience and cultivating support is an investment in future sales. Customers are the best source of capital. Spend time responding to blog posts, answering emails, and meeting your customers face-to-face.
Tip: Your customers provide the best form of advertisement and a source of non-dilutive capital. If you make time for your customers they will make time for you.
The biggest mistake that startup founders make in allocating their capital is not monitoring financial results. As a result, they end up engaging in activities that fail to enhance profitability. Here are three profit-eroding expenses that startup founders should avoid:
Too many founders target markets that are sexy in order to attract great publicity. But if that segment isn’t buying, the business is just throwing money down the drain.
Tip: Position your company in front of high-value customers, not just sexy customers. Find the most profitable markets, regardless of the flash and hoopla.
Founders often fall into the trap of believing that they need to attend every industry event on the planet. Yet traveling usually requires sacrificing time and money.
Tip: Attend only events that have potential to result in revenue generation. A low-key event in your home town may yield stronger financial returns than a posh soiree overseas. Do your homework and know before you go.
Another mistake that many founders make is to try and solve problems by hiring a lot of high-priced talent. They wrongly believe that more bodies equates to more sales.
Tip: Only hire people who believe in your product or service and are willing to work on a primarily commission-basis to prove themselves. One highly motivated salesperson can produce the same results as a team of demotivated, salaried workers.
The biggest mistake I see entrepreneurs make during fundraising is taking too much money too soon and from the wrong people.
I believe the best money you can raise is from your customers. With the increasing popularity of crowd funding, and the new legal changes, it has become easier for entrepreneurs to secure non-dilutive funds for their idea.
If crowd funding is not a fit for your company, you can attempt to seed your company by solving a real problem for a paying customer. This strategy is also a non-dilutive event that allows you to avoid accepting the wrong investor(s) too soon. A paying customer also provides credibility to your idea and valuable feedback.
If neither of the options above work well with your funding strategy, you can always raise money through a convertible note. A convertible note will allow you to avoid placing a valuation on the company and issuing equity. It is still critical that you select the right investor(s) and negotiate the right amount, as note holders do have the right to convert into the next equity round.
Once you’ve successfully seeded your company, and have demonstrated growth, you are ready to look at Series A investors.
There are three things to consider when selecting Series A investors.
Board Seats – Most venture capital funds will require a board seat for the partner who leads the investment in your company. Naturally, you will not want to give away more than three board seats during your first institutional round, so you will need to structure this accordingly. Prioritize your list of investors, and select based on fit, not deal terms.
Expertise – As you bring on more investor, you bring on more opinions. Be certain that each investor you bring on is adding value. You don’t want to add an investor who is bringing capital only. Passive money seems like a good idea at the time, but those who do not have domain expertise are likely to become a liability when they decide they want to exercise their right to provide input into managing the company.
Expectations – Make sure you understand, and are comfortable with, the expectations of your investment team. Most investors will require submission of financial statements and attendance at regular board meetings. It is best to be proactive in managing your investors’ expectations. Don’t wait for something to go wrong to ask for help. Communicate with your investment team on a regular basis.
In summary, less is more. Many entrepreneurs make the mistake of believing they should raise the most capital possible at the highest valuation possible. In reality, entrepreneurs should focus on taking the least amount of money possible from the right investors, regardless of valuation.
As an entrepreneur building a company, you should always be focused on learning from those who came before you. With that goal in mind, I’ve documented five lessons from five entrepreneurs who shared their wisdom at Startup School.
Current: Founder of stealth-mode company and board member at Google
Past: Founder of Vxtreme (acquired by Microsoft) and VMware (NYSE: VMW and acquired by EMC)
Lesson 1: Have a big vision and be persistent.
When you have a big vision, and work diligently toward it, you will attract the right resources. Diane Greene set out to build VMware during the dotcom implosion. It was a difficult time to get funding, but her passion for her idea attracted the brightest minds and the biggest wallets.
She knew recruiting Larry Sonsini to her board would position her company for success. Larry has been a part of nearly every major tech deal in Silicon Valley. The only problem: she didn’t know him. But when you have a big vision and are passionate about it, you will find a way to succeed.
Diane knew an attorney at Larry’s firm and promised VMware’s business, contingent on the attorney setting up a meeting with Larry. Unfortunately, she met with Larry on a Friday afternoon and he said he was not currently interested in joining any new boards. But when you’re passionate about your vision, you see opportunity when others see obstacles. She took the opportunity to talk to Larry about her vision for VMware. She left his office feeling disappointed that he didn’t accept her offer, but content knowing she gave it her best shot.
On Monday morning at 6:00 AM she received a voice mail from Larry Sonsini. He was ready to join her board.
Current: Founder of Square
Past: Co-founder of Twitter (NYSE:TWTR)
Lesson 2: Create a list of dos and don’ts.
Jack Dorsey is known as one of the founders of Twitter and current founder of Square. At the age of 36, two incredibly successful companies is a major accomplishment. So, how does he do it? Jack let us in on his secret weapon: a do list and a don’t list.
Do — Stay present, be vulnerable, drink only red wine and lemon water on the weekdays, do six sets of squats, run three miles, meditate, say hello to everyone, video journal, and get seven hours of sleep.
Don’t — Avoid eye contact, be late, eat sugar or wheat, or drink hard alcohol.
It pays off to create a list of things you want and don’t want in your life if you plan to be a successful entrepreneur.
Current: Founder of Watsi
Past: Pacific Community Ventures and Peace Corps
Lesson 3: Let go of fear.
Chase Adams had a brilliant idea for a company. While he was working for the Peace Corps, he saw firsthand the power of connecting real stories of people in need to those who could assist them. He worked on his idea for months. When he emailed friends and family to announce his company, he received a lukewarm response.
Unwilling to give up, he started to brainstorm. He wondered where he would find people interested in his project. Then he had a brilliant idea: what if I posted this to Hacker News? His fear set in as he recalled witnessing other entrepreneurs face scrutiny and ridicule after posting their ideas. He decided to post and wait for the outcome. After posting his idea, he received 16,000 visits to his site and 100 percent of his projects were funded.
A few months later, Paul Graham, founder of Y Combinator, read about Chase on Hacker News and sent an email requesting a meeting. An hour after the meeting Paul made an investment.
Current: Partner at Andreessen Horowitz
Past: Founder of Hunch (acquired by eBay) and Site Advisors (acquired by McAfee)
Lesson 4: Be willing to take on problems that are not popular.
Sometimes good ideas look like bad ideas. The big companies are already focused on the ideas that look good. It’s up to entrepreneurs to tackle those problems that are not obvious. Some times those not so obvious ideas look like bad ideas.
Many of today’s top companies were initially met with disapproval. Google, eBay, Kickstarter, and AirBNB struggled to find initial traction with investors. Many dismissed them as too niche or structurally flawed. However, the entrepreneurs behind these companies knew they needed to be open to criticism and rejection if they wanted to succeed.
If you are focused on building a billion dollar company, you have to be willing to filter the naysayers. Not all good ideas are obvious at first.
Current: Co-founder and CTO of AirBNB
Past: Stellar engineer
Lesson 5: Don’t quit until you’ve given it 100 percent.
We all know and love AirBNB, but few know that success did not come easy for the company.
Following in the footsteps of Twitter, AirBNB launched at SXSW. The company hoped for astronomical success, yet only yielded 12 sign ups. Undeterred, they heard that the Democratic National Convention was in a few months. They reached out to property owners and signed up 800 properties per week. Their story was picked up by the local news channels and CNN International. Yet again, the results were discouraging.
Believing that they wanted to give it 100 percent before closing shop, they applied to the Y Combinator program. They were accepted, but unfortunately their acceptance was during the most difficult time to raise capital for startups. They were told to get “ramen profitable,” an expression that is used to describe the state of barely breaking even. They worked from 8:00 AM to 12:00 AM every single day to figure out what was needed to make their company a success.
Their big breakthrough came when Paul Graham told them to, “Do things that don’t scale.” They focused on their most devoted market: Manhattan. They flew to New York and met with forty committed renters. They built relationships, offered to take professional photos of the properties, and wrote property descriptions for free.
A few months later, an investor they met through Y Combinator was impressed by their vision and tenacity and wrote them a check.
In summary, entrepreneurs need to be persistent, humble, and focused. You will fail in the beginning. People will laugh at your idea. The idea of quitting will haunt you. You will feel like a complete loser. The biggest lesson I learned at startup school is that winners are resourceful and they find opportunities. They don’t make excuses for why it won’t work. They get focused on ways they can make it work.
What lessons have you learned while building your company? Let me know in the comments.
If you want to learn about revenue models and financial statements, use the link on the grow page for free access to Lean Finance for Startups.