Home Management From Private to Public: Lessons Learned from the IPO Process

From Private to Public: Lessons Learned from the IPO Process

by Guest Writter
David Spitz, CEO, ChannelAdvisor

I’ll never forget the sound of the bell ringing. As I stood on the platform of the New York Stock Exchange, surrounded by our senior leadership team, I knew it was a moment I would never forget. The jubilation was like the final ringing of the class bell on the last day of school. But this wasn’t an ending — this was the beginning of a new era. On May 23, 2013, ChannelAdvisor went public.

The process of filing an initial public offering (IPO) certainly didn’t start there — it ramped up almost a year earlier, in what felt like a lifetime. IPOs are a spectacle. They’re thrilling, exhausting, time-consuming and rewarding, all at the same time. At a high level, the process looks like this:

  • Test the waters with potential underwriters. Decide whether it makes sense to commence the IPO process, which will require a lot of time, cost and attention.
  • Host a “bake-off” in order to select the best banks to underwrite the deal — your “bookrunners.”
  • Meet with underwriters for many hours for multiple days to draft the S-1 registration document.
  • Host an analyst day where you provide a deep education about the business to the analysts who will eventually cover you in the public markets.
  • After many months of drafting and iterations, file your S-1 with the SEC. We filed our S-1 confidentially, so we kind of had to celebrate silently, but it was quite a moment.
  • The SEC will have comments and questions and you have a few more weeks, if not months, of back-and-forth until your S-1 is deemed “effective” and ready to go.
  • Begin the “roadshow,” where you pitch your business model to analysts and prospective shareholders. This is a grueling two-week process that requires extensive preparation and will test your stamina!
  • Ring the bell and watch how the market reacts to your IPO

If Berkshire Hathaway’s annual meeting is the “Woodstock for capitalists,” then doing an IPO is like climbing Mount Everest for capitalists. It’s something few CEOs and senior executives get to experience.

I was new to the process and learned a lot during ChannelAdvisor’s IPO. It was a fascinating process. Getting to see an IPO “behind the curtain” was an experience I’ll never forget — and I learned a ton. The strategies and lessons I learned along the way are worth sharing with CEOs and entrepreneurs who are considering the move from private to public.

An IPO Is Not a Finish Line

There’s a misconception that an IPO is a liquidity event or part of an exit strategy. While an IPO can provide eventual liquidity for investors and cash on the balance sheet, it’s certainly not an “exit” — if anything, the stakes are higher post-IPO than anything you’ll experience as a private company CEO. IPOs are fundamentally a financing event to take your company to the next level. It’s a new beginning, with new challenges and opportunities, not a finish line. Many companies use IPOs as part of a strategy to raise capital and diversify their equity base. An IPO will open the door to new areas of investment opportunities for your company because you’ll have cash that wasn’t previously available.

At the same time, you’re in the spotlight once you go public. You’ll really need to focus on managing investor and employee expectations. Remember that you’re in it for the long haul, and success as a public company won’t come overnight nor will it be easy. Be 100 percent certain that your company would ultimately benefit from being public and that you’re ready to make the transition. Public companies, and their executives, can be easy targets for critics and arm-chair quarterbacks, so be prepared to grow a thick skin. There’s also a whole universe of regulations that applies to public companies that you need to understand in depth as CEO.

A Network of IPO Veterans Goes a Long Way

One of the most helpful things you can do before going public is to cultivate a network of other CEOs, CFOs, and business leaders who previously went through the IPO process. This is an important step — you’ll need those resources to help you with questions along the way. I found that many executives who had gone through the process were more than willing to share their experiences and wisdom, even if I just called them out of the blue. It doesn’t hurt to ask.

Our network of IPO-savvy entrepreneurs was critical to helping us develop strategies for going public and providing an outside opinion. I’m not ashamed to admit that I had to call a close mentor of mine to ask him: “What the heck is a bake off? Did I have to prepare for it?  Was I supposed to bring something?” There’s no brochure for learning the steps to a successful IPO, and people who’ve done it before understand that it’s a complicated process. While you’ll get a ton of great advice from your bankers, lawyers and accountants, that’s not the same as the feedback you’ll get from other CEOs — the perspective is different. Put simply, you can never ask enough questions.

Your Patience and Endurance Will Get Tested

One thing I quickly learned while preparing for our IPO was how much detail and time goes into drafting the S-1. You’ll spend countless hours in conference rooms with bankers, accountants and lawyers who are poring over every word and punctuation mark in your draft. It will undoubtedly be one of the most descriptive business summaries that you’ll ever write about your company. I actually found it helpful to draft the first full version of the document — I knew the business better than the others in the room and it made the subsequent drafting easier.  But I still spent dozens and dozens of hours working with them to perfect it.

Once your S-1 is deemed “effective” by the SEC and your prospectus is done, the roadshow begins. This involves traveling all over the country, and sometimes internationally, to visit investors like mutual funds and hedge funds to explain the business, in the hopes that they like it enough to “put in an order.” It’s a simultaneously exhausting but exhilarating process that usually involves 12-hour days where you’re rushing between meetings (we pitched our company about 80 times in eight days, sometimes traveling to as many as three cities in one day).

We really enjoyed this process. You’ll receive questions about every aspect of your business throughout the day, and you’ll have the opportunity to explain why your business model works and what makes you so enthusiastic about your company.

While it’s gratifying to see your order book build up, it’s also nerve wracking. You don’t know how “oversubscribed” you’ll be until the very end (some investors like to hold their cards close to the vest and only put in an order at the last minute). You also don’t know “how many times you are oversubscribed,” which is the level of demand for your shares and a primary input into the pricing decision you have to make the night before you debut as a public company. Meet insufficient demand and you’ll price below your range, or, catastrophically, you’ll have to pull the whole deal (along with all that work that went into it). Meet strong demand and you can price within, or even above, the range you set at the beginning of the process.

Date the Banker, Marry the Analyst

Developing a strong relationship with investment bankers is critical to ensuring a successful IPO. They will shepherd the process and put you in front of the right people to invest in your company. However, it’s the “sell-side” analysts who are the folks you live with several years after the IPO. Companies usually get to know bankers and analysts months or years before going public.

You want analysts who fully comprehend your company’s dynamics and have experience in your industry. Keeping a close relationship with analysts will help you understand the outside perception of your business and ways to develop investor communication strategies to address questions or concerns. Think of analysts as your pulse of the investor community. While analysts (and Wall Street for that matter) shouldn’t drive your strategy, I’ve found the level of insight I get from analysts and investors, who from their perch see tons of companies and are great at pattern recognition, to be invaluable.

It’s All Worth It in the End

Going public is an exciting undertaking. Of course, you’ll deal with high stress levels, and you’ll be tested throughout your preparation. Ultimately, you’ll add some cash to the balance sheet that will allow you to fund immediate expansion and invest in future growth.

Having the ability to reward employees with stock options will enable you to build a stronger workforce and retain team members. As a public company, you’ll generate a greater level of prestige in the market and within your industry.

So have fun, take it all in and enjoy the ride!


About the Author

David Spitz, ChannelAdvisor’s CEO, is responsible for leading the company in its mission to provide retailers and branded manufacturers with the software and services needed to successfully sell their products via online sales channels. Before joining ChannelAdvisor, Spitz founded and successfully exited multiple venture-backed software companies. He was most recently an entrepreneur-in-residence at the Aurora Funds, a venture capital firm with more than $200 million under management. Prior to Aurora, David was president of Avesair, a mobile marketing company that was acquired by Inphonic. Previous to Avesair, David was co-founder and CTO of Netsation, a network management software company acquired by Nortel Networks.

David received a Bachelor of Computer Science from the University of California, San Diego. David recently was awarded the Triangle Business Journal’s 2010 CFO of the Year Award, and in 2008, David received the Triangle Business Journal’s Top 40 under 40 award. David has also been awarded three U.S. patents, is past chairman of the North Carolina School of Science and Mathematics Foundation Board and is a member of the executive committee and board of directors for the North Carolina Council for Entrepreneurial Development.

[Photo credit: Lending Memo]

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