What Startup Founders Should Know Before an IPO

Going public can be an exciting moment for founders who have built their business from the ground up and gone through the rigorous IPO process.

But knowing how to actually get there and adequately prepare for the IPO process isn’t always clear for founders of hyper-growth startups.

To clear the air, Pilot’s Co-Founder and CEO Waseem Daher sat down with IVP General Partner Ajay Vashee for an hour-long webinar on how startups can transition from growth to IPO, as well as what founders can do beforehand to set their companies up for success.

Key Takeaways:

• Before you pursue an IPO, consider whether you have a durable, predictable business and if your legal and finance teams are ready to fulfill the operational tax of being a public company.
• Focus on investments and growth plans for your company over the next 10, 15, or even 50 years, not just on those for the next year.
• Private and public companies alike should demonstrate that they can effectively bring new products to market, create engagement around it, drive meaningful usage, and deliver results.
• It’s important to develop clear and concise messaging that explains how your company works in a way that everyone, including employees, customers, and investors, can understand.
• Operating a private company like a public one can also help you, as a founder, develop prudent and easily repeatable business habits that will be helpful in the long run.   
  

When founders should be thinking about an IPO

It’s never too early for founders to think about going public, and there are a number of factors that are within your control as a founder, such as whether your business as a whole and all the teams that will play key roles in the IPO process are ready. 

But founders and businesses in general have less control over other factors, such as market conditions and how receptive people will be to your business and what it offers.

According to Ajay Vashee, a general partner at venture capital firm IVP, founders should at least consider three questions before they pursue an IPO: 

• Do you feel like you have a durable, predictable business at scale?
• Are your legal and finance teams ready to fulfill the operational tax of being a public company?
• Are market conditions opportune?
  

“I would say predictability is super important so you can maintain credibility as soon as you go out with ‘beat-and-raise’ and street expectations,” Vashee said. “People feel like you have a great grasp and handle on the business.”

The most important factor, however, is durability of growth, “and it's never too early to start focusing on that,” Vashee said. 

Even before you consider the prospect of an IPO, it’s important to not just focus on investments and growth plans for your company over the next year but also feel great about continuing that momentum and meeting expectations for the next 10, 15, or even 50 years.  

“If you have the rhythms in place and you're executing against all your horizons in a way that you feel great about, then that's the most important component to a successful life as a public company,” Vashee said.

Crafting plans and laying out investments for the future can ensure that founders have a business model that doesn’t just focus on short-term success but on long-term wins over time, Daher said.

It’s also generally important for founders of private and public companies to demonstrate that they can effectively bring new products to market, create engagement around it, drive meaningful usage, and deliver results through business impact and monetization.

“If you can demonstrate that as a private company or a growth-stage company and the run up to your IPO, it just pays off in dividends,” Vashee said. “It pays off in dividends because you have your own internal faith and execution. It pays off in dividends because, as you pitch a longer term vision for the company and the term expansion, where you're going to be extending into these new categories and new products, everyone you're telling that story to believes in it, because you've proven it.”

Regardless of whether an IPO is on their radar, founders raising money at any stage must always be ready to explain how they launched something, got the word out, brought in revenue, and ultimately have the processes and resources in place to do it again. 

“Of course you need a compelling story, and you want to be able to tell a compelling story, but it’s even better to say, ‘Well, you don't have to take my word for it. Look at our track record. We have done it and that's why you should believe that we will continue to do it because we've demonstrated at a smaller scale — or maybe in a different market — that we operationally have built the muscle. We have the team and the sophistication needed to do this sort of thing.’”

What founders get wrong about going public

Although there’s a belief that the path to an IPO is taxing and painful, the actual journey itself can be enlightening since you must explain how your company works in a way that everyone, including employees, customers, and investors, can understand.

“I think the IPO process can be really energizing and fun,” Vashee said. “It can help institute a healthy level of focus and business discipline internally because you go through this really intensive process where you have to distill everything you're doing down to this easily communicable, succinct kind of ethos, such as who we are as a company, what we’re doing, how the product works, and how the business works. And that narrative has to be one that can be understood by so many different constituents in the IPO process.” 

This process, Daher said, is like “the ultimate messaging and positioning exercise” for founders.

“You need to be able to tell your story,” he explained. “The reason you need to refine this isn’t because your investors need it — it’s because it will touch everything you do with your internal communications, website, and marketing.” 

Operating a private company like a public one can also help you, as a founder, develop prudent and easily repeatable business habits that will be helpful in the long run. 

For example, closing the books every quarter, conducting a thorough analysis of the company’s financial performance, creating a new forecast around those outcomes, and clearly communicating it all in a way that demonstrates mastery and control over what’s happening will help founders run their business effectively even after the IPO process is done.  

“If you harness all of that the right way, it can be an accelerant to what you're trying to achieve as a company,” Vashee said. “If you let it become a tax on everything that's happening and you view it through a negative lens, then it can be really painful.”

Though businesses often create forecasts to predict future outcomes and make data-driven decisions, it can also help investors determine whether executive teams understand the fundamental drivers of their business. 

“If we consistently forecast well and hit the forecast, it shows that we actually understand the drivers of the business, which is useful,” Daher said. “It's useful because it means that we understand the machine we've built and therefore how to debug it, if something goes wrong, or further scale it.”

How to balance growth and profitability

As the CFO who guided Dropbox through its IPO process in 2018, Vashee sought to increase the company’s post-IPO cash flow margin and set an ambitious target of $1 billion in free cash flow by 2024.

Despite his hard push for profitability at that time, Vashee has a slightly different perspective now as a general partner at a venture capital firm who sits on a number of company boards.  

“I see a push too early on from so many other folks around the table who are like, ‘OK, growth is great, but we need to think about cash burn and everything,’” Vashee said. “By no means am I advocating being irresponsible, but I think if you have something that's working and a vision that is resonant and achievable, making sure that you achieve that vision is the most important thing. There are many ways we can architect the right margin structure for the company in the future, especially with folks like me helping around the table, but let's not lose the opportunity in the meantime.” 

Though profitability optimizations are important, they are “a little bit like a one time lever,” Daher said.

“You pull it, you do it, and it does improve, but it won't necessarily pay dramatic returns over time in quite the same way as continuing your exponential growth pathway or adjusting the percentage of the rate of that exponential growth,” he explained.

The problem is that it’s difficult to continue at some rate of exponential change or improvement when you roll out profitability improvements and need to make that transition from public to private infrastructure. 

“Save some of that gas for the IPO in your first few quarters as a public company,” Vashee said. “Do not pull all those levers before you go public because if, all of a sudden, you go public with really good margins and they don't get any better, you're going to get in trouble for that.”

Final thoughts‍

A lot can be said about the path to an IPO, but it doesn’t have to be painful.

Developing a repeatable go-to-market process, getting your finances in order, crafting the right messaging for your company, getting the right people on key teams, and focusing on promising, yet achievable opportunities early on can make it easier for you to raise capital and potentially go public. 

And regardless of whether you want to pursue an IPO, operating your private company like a public one can instill the business discipline that’s needed to achieve short-term gains and long-term success. 

Interested in hearing the rest of their conversation? Check out the full on-demand webinar,  From Growth to IPO with IVP.