Any Hollywood mogul will tell you that certain givens apply when a star’s latest film goes public — the media blitz, the slick promotions, the buzz buildup. While Wall Street sits on the opposite shore, companies ready for IPO time aren’t all that much different. Even the clamoring from the peanut gallery is similar: The public goes crazy before the would-be blockbuster goes public.
But here’s where the parallels end: If 50 bucks (that is, two tickets and a small popcorn) are all you’ll have riding on a movie being a hit, the stakes get much higher for investors betting that IPO stands for “incredible profit opportunity.”
That’s especially true in the high-tech world, though telling the e-forest from the e-trees takes some fundamental discernment. “I see about 60 to 70 tech companies every year and the quality of pre-IPO companies has risen in 2016,” says Al Ramadan, co-author of “Play Bigger: How Pirates, Dreamers and Innovators Create and Dominate Markets,” and a co-founding partner at Play Bigger Advisors in San Francisco.
[See: 7 Global Goats That Could Bring Market Mayhem.]
So what makes the winners stand out from the wannabes? “The most exciting companies I see create,” Ramadan says. “They give us new ways of living, thinking or doing business, many times solving a problem I didn’t know we had — or a problem we didn’t pay attention to because we never thought there was another way. They don’t sell us better. The most exciting companies sell us different.”
Yet IPO could just as easily stand for “impatient people overreacting,” as going public means answering to a whole new set of bosses known as shareholders.
“Private investors are fine missing a quarter to win a bigger goal,” says Richard Rampell, principal-in-charge at the Palm Beach, Florida, office of national accounting firm MBAF. “Public investors tend to be less forgiving, and the gyrations of a public stock price can cause massive employee morale issues in a way that isn’t possible when the company is private.”
And sometimes, companies have to pull back before they let the Box out of the bag. That’s no clumsy metaphor, but a true piece of recent market history.
Box, a secure file sharing company, almost went public too early in 2014, says Mike Doonan, an investment banker turned executive search partner at San Francisco’s SPMB.
“The market was riding high and every company was looking to Box to be the star they could follow,” Doonan says. “But watching Box prepare for their IPO was like watching a wild buffalo break away from the pack and run toward a cliff — with the herd blindly running in tow.”
Then Box held off. Sure, the founders and backers could’ve made a killing. But in short order, weak market conditions could’ve killed them. “Had Box gone public, they would’ve had a weak IPO and poisoned the well for the next series of companies looking to go out.” Doonan says. “Their pullback saved the entire technology community from itself and led to the continuance of the gravy train we’ve had since in the last two years.”
It’s also set the stage for a pair of companies that have disrupted the taxi and hospitality industries — Uber and Airbnb respectively — to take turns ringing the opening bell on Wall Street sometime soon.
[See: 8 Soaring Stocks That Suffered the Big Bounce.]
“Uber is effectively the world’s largest taxi company without owning a single physical taxi, while Airbnb is the world’s largest hotel company, also without owning a single hotel or parcel of land,” Rampell says.
Another hot area is “software as a service” (SaaS), where companies offer their server farms, support staff, and software to other businesses. Among the companies to watch in this area are Docusign and Insidesales.com, says Drew Pascarella, lecturer of finance at Cornell University’s Samuel Curtis Johnson Graduate School of Management.
“These two SaaS-based software companies are focused on the enterprise sales process,” Pascarella says. “I like the SaaS business model for obvious reasons. It has a steady, predicable revenue — which Wall Street loves — and with its focus on the sales process, it’s very easy for a new customer to see the return on investment.”
Like Box, all of these companies could find cashing in on IPO day a mighty tempting prospect. But going public is about much more than having impressive numbers; it’s also crucial that the financial accountability exists to back them up even before the first share is sold.
“The most critical sign for an auditor that a company isn’t ready to IPO is if the company doesn’t have effective internal controls over financial reporting and the ability to report financial results timely and accurately,” says David Bukzin, partner-in-charge at Marcum LLP’s New York City office.
And some IPOs will never see the light of day — not because they wouldn’t stand a strong chance, but because a stronger company snatched them away.
Compared to the cautious IPO market of late, “the acquisition market has become relatively more attractive,” says Doug Bontemps, managing director at Silicon Valley Bank. “We’ve seen larger companies increase their acquisition activity, looking to buy companies with interesting technology, market positions, new business models and talent for lower prices than were required in the past.”
Case in point: “Unilever’s (ticker: UL) $1 billion purchase of Dollar Shave Club provides a meaningful market share in a new direct-to-consumer model,” Bontemps says.
“Acquisitions are big right now, there’s no doubt about it,” says Kamal Ahluwalia, chief revenue officer for San Mateo, California-based Apttus, a quote-to-cash software provider. “And sometimes some of those larger organizations are looking to add individual capabilities to provide their users with more capability and value.”
As for the going-public process, Ahluwalia’s in the thick of it, as Apttus has cleared many a private funding round prior to what might be the Big IPO Event. Yet even for the role Apttus plays in a high-tech 21st Century marketplace, one cornerstone of its strategy remains timeless.
[Read: The Valuable World of Value Investing.]
Ahluwalia sums it up thus: “It’s important to understand the somewhat old-school approach of operating in the black and building a successful company on sales — not just ideas.”
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From Growing Private to Going Public originally appeared on usnews.com
