November 1999   

If you’ve wondered how to capitalize on the trends set by the major players, or if you can no longer fund expansion as you would like, you may find that an IPO can serve as an alternative way to take your business to the next level. Even the process of thinking about an IPO can lead you to improve your marketing strategy and help your business grow.

Making Use of Pre-IPO Methodology

The process of converting to public ownership isn't easy. It's filled with seemingly unproductive documentation and service-related expenditures that can be grueling -- and many entrepreneurs consider these items to be low-priority. That is a huge mistake. Don’t discount this "busy work;" instead, consider it an opportunity. Documenting your plans and drumming up the publicity that your business needs before you even start the IPO process can trim dead weight in your organization, bring in new customers, and expose new avenues of sales potential. Ultimately, you may never actually launch an IPO; nonetheless, chances are that just by planning for one, you will substantially improve your market position and profitability.

 According to The Wall Street Journal, almost 200 companies are currently in the IPO process; of these, 75 percent are technology and/or telecommunications-related. Many times that number of companies are jockeying to position themselves for future IPOs. In moving toward an IPO, you can establish your company as a leader in its industry, or reaffirm its current leadership status. With the money generated from an IPO, you can finance the acquisitions of rival or complementary companies, thereby increasing your piece of the pie and, potentially, your share price as well. Of course, you can also convert your sweat-equity and personal investment into cash, and if this interests you, you're not alone. Venture capitalists, investment firms, and private investors alike are out on the 'Net, trolling for likely IPO prospects.

Assessing Your Strengths

No matter how successful your business, you may not ever be a candidate for an IPO. What tips the scales? Often it's just plain, old-fashioned marketing. Your company needs a unique angle that will attract those all-important venture capitalists and underwriters. Do you have what it takes? Find out by answering these difficult questions:

• Differentiation: What product, service, or technology do you have that sets you apart from other “dot-com's”? 
• Strategy: What is your business strategy and how does it distinguish you from your competition? 
• Potential: What are your growth plan and schedule? Are they realistic?
• Resources: Do you have the capital and personnel to devote to promoting your company's public image and investment appeal while you tend to your primary business interests?

Assembling the Players

A well-written, well-structured business plan is a powerful way to communicate your own confidence in your company. And putting together a seriously attractive plan can be seriously expensive and time-consuming. If you ever want to proceed with an IPO, your prospectus will be as much a “who's who” as a “how to,” so star-studded personnel are a must. You and your staff will need to become increasingly visible (and investible) and you'll want to address the following issues:

Who will sit on your corporate board? Board members should be influential, trustworthy, knowledgeable, familiar with the company, and familiar to investors and potential investors. Start assembling some celebrity-power as soon as possible. Offer potential members motivational incentives, such as contributions to their favorite charities, vehicles to market their own products, and opportunities for self-promotion. Also, plan on giving them a portion of the gains from the IPO if and when you go ahead and take the plunge.

Who will be your legal counsel? Your attorneys should be thoroughly familiar with IPOs, technology, and venture-capital issues. Your law firm can be your best friend or your worst enemy, so choose wisely. Understand that the right lawyer can automatically give you credibility where it counts. Find someone who has worked with the “big boys” and you will find yourself one step closer to their arena.

Who will handle your finances? Your prospectus will need to include detailed financial statements to inform investors about the financial status of your company. Therefore, your accountant(s), like your lawyer(s), should be familiar with prospectus design as well as the IPO process. Using an accounting firm that has handled IPOs in the past may seem more expensive at first, but their experience ultimately can save you hours and money. In addition, they will enhance your credibility.

Invest in Your Investors

Before you approach anyone about investing, you'll need to communicate your ideas to venture capitalists and underwriters. According to Wit Capital, an underwriter is “an entity, usually an investment banking firm, that contracts with the issuer to guarantee the issuer its money and shoulder the responsibility for marketing (distributing) the security.” The Wall Street Journal notes that companies beginning the IPO process often use “anchor” investors as selling points, to set themselves apart from the crowd. Influential companies with recognized names in business, such as Goldman, Sachs & Co., Microsoft, and Cisco, to name a few examples, are considered “anchor” investors.

When you have an innovative idea to promote, you are briefly in the driver’s seat when dealing with investment bankers. At this point, you can interview the firms you’d like to deal with. Use your negotiation skills (or hire a pro): if you want to have a specific person handle your IPO, get a written guarantee of his or her participation. One potential area for disagreement with your underwriter is the price set to sell your stock at the IPO. Some companies have even fired their bankers over price disputes. Unfortunately, no scientific methods exist to determine the best price. Most are determined via a “gut feeling.” Ultimately you should realize that the backing of a well-known investment-banking firm can help mitigate the public’s perceived risk of buying your stock, and that typically, the firm will receive seven percent or more of the proceeds from your IPO.  

The Essential Step in Launching an IPO

Drafting a prospectus is the first step in actually initiating an IPO. Expect to spend six weeks or more writing the document, and bear in mind that its content and presentation are crucial. The prospectus is the only means by which the Securities and Exchange Commission (SEC) allows companies to communicate with potential investors. It needs to be strong enough to survive the SEC's mandatory “quiet period,” which lasts from the moment you file it until 25 days after the stock has been trading. 

A well-designed prospectus can also protect you against potential lawsuits. You must define every possible risk to investors, in case your company fails. (This is where the lawyer comes in handy!) And you'll need to set forth what you will do with the money acquired from the IPO. (Here's where your well-conceived business plan, which you drafted even before you decided to pursue the IPO, can be re-used!) 

A great prospectus isn't made up of smoke and mirrors; rather, it's based on a great business strategy. Every ounce of thought that goes into your business plan, and ultimately into your prospectus, will strengthen your business. Whether or not you've ever considered an IPO for your company, investing in an IPO evaluation -- either on your own, or through a company familiar with IPO requirements -- can help you to leverage the strength of your business.

Differentiation, branding, and niche-marketing are just as appealing to your customers as they are to potential investors, so take the time to draft an outstanding growth strategy now, while your business is growing. Whether or not you ever proceed with an IPO, the evaluation involved can only improve your success potential.