IPO pro Lise Buyer on what you need to IPO in the next six months

January 15, 2019

Last week, I sat down with IPO pro Lise Buyer to talk about the Bay Area ecosystem for a Sirius XM radio show thats broadcast from Whartons San Francisco campus.

Buyer was the host and I was the guest, but because the IPO market is top of mind for so many in the startup industry right now, I asked if I could turn the table for a few minutes on Buyer, who is best known for helping to architectGoogles2004 IPO and for theIPO advisory firm she founded in 2007, Class V Group.She shared whether she thinks the IPO market will pick up substantially next year, and what it takes right now to become a publicly traded company.

TC: Weve seen eight IPOs in the last six weeks.

LB: After the first six months of the year, were on track to have a pretty average year in terms of IPOs; theres momentum.

TC: But were heading into the final months of the year an election year.

LB: I think IPOs aregoing to grind to a halt temporarily in November, even leading up to November, pretty much starting [this]week, because everyone is afraid of the election, and markets dont like uncertainty, and whatever you think of the candidates, one of them is a little less predictable than the other. And should Donald Trump be elected president, Id expect the markets to express some. . .Ill be kind and say,wicked bad indigestion. And I dont think anyone wants to take their company public in the middle of that.

TC: Do you think the companies that have gone out in recent months are solid? Do you expect their share prices to hold?

LB: Are these solid companies? Yes. Do I expect [their share prices] to say where theyre trading? Well see. A number of them did very small deals, and they did very small deals because no one was quite sure of how the market would be. So if you have a product to sell and youre not sure of what kind of price you could get, [you start with little inventory].

Twilio did a$150 millionIPO in June, andthey recently announced a $450 million follow-on offering. When they announced that, their share price [fell]; then they announced that theyd had a terrific quarter, and the stock is recovering.Its a supply-and-demand issue.

TC: When did we start to see these smaller floats, and is it something you recommend to clients? Is it a good trend, a bad trend?

LB: Weve seen this periodically for years.It used to be that you sold 10 to 20 percent of your shares in an IPO but LinkedIn only sold8 percent of its shares. Valuations are low, so companies are smart to take advantage of the [demand created from]limited supply. Also,why sell for a low price and take the incremental dilution? The best path is to prove the companycan function effectively as a public company, and onceinvestors are convinced that the risk isnt that great and that the company understands the ramifications [of being publicly traded], do a higher-value secondary.

TC: Which you can do before a 180-day lock-up, correct?

LB: Investment banks have the ability to release the lock-up early. So you have to get your banks approval to do it, which basically means that you agree to use the same banks [that underwrote your IPO]. So weve seen them not infrequently after four months in those cases where the company has met expectations and its stock has performed well. If a companys shares arent trading above its IPO price, you wont see an early lock-up.

TC: What are bankers telling startups right now? Do they need to be profitable?

LB:A year ago, everyone was talking about growth. Growth, growth, growth, growth. Then, public investors said, We care that these companies arent going to forever need to be taking new investments from private investors or even public investors. We want to see these are grown up companies that can stand on their own two feet and be profitable, or at least cash flow profitable. So the pendulum swung in the opposite direction, and I think were swinging back a little bit now, to the point where investors are saying, You dont have to be profitable by Q4, but I want to see a real path to profitability because the private investor waterfall has dried up.

TC: Everyone is dying for Uber to go public. Where do you think it would price today? Its privately valued at $60 billion plus; investor Keith Rabois suggested six months ago that it could go out closer to $25 billion.

LB:Im not going there, but when you have super-high profile companies, you get almost unlimited demand from [financially unsophisticated] investors. People want to buy it at any price. And sometimes that bids the stock way up on opening day, andsobering up is investors problem.

TC: How important is a Snap IPO for the current cropof unicorn companies? Everyone thought the floodgates would open after Facebook went out and that didnt really happen.

LB: People often put too much emphasis on any one deal, and the world doesnt work like that. The bigger impact is that weve had eight IPOs in September that were successful, which means that institutional investors are interested in newgrowthopportunities. Surely there are highly valued unicorns that will be watchingwhat Snap does, but its a very small subset of candidates that looks like Snap.

TC: The presidential election takes place next month. What usually happens after an election?

LB: I do think the markets [get put on]hold until afterward. What really happens immediately after is you have Thanksgiving and Christmas, and while we might get a few more offerings between now and mid-December, it wouldnt be surprising to see a number of public filings in January.

TC: A big number?

LB: No, nota huge number, because its not a short process, and if you didnt start it by August at the latest, you arent going out in 2016 or early 2017.

TC: Speaking of numbers, how many companies are you helping prepare to go public right now?

LB: The goal is to work closely with about four companies per year, though timing is always challenging because companies think theyll be out in nine months, and nine months sometimes turns into a two-year deal. Our goal is to be a McKinsey, meaning smaller and elite, opposed to the larger accounting firms that work with many more customers. So there are no junior people on staff. Leslie [Pfrang, a former managing director at Deutsche Bank Securities]and I areselling our frontline experience gained over the last 20 years.

TC: How many companies are taking advantage of confidential filings? All of them?

LB: Almost everyone who can [because there are size limitations]. Thats perhaps a positive from the JOBS Act; companies that are uncertain about markets can get the ball rolling without getting theirnumbers out in front of the competitors. The downside is your employees dont know until 15 days before [a companys roadshow], and that leaves employees almost no time to do personal financial planning. Confidential filings also give institutions less time to do research unlessits acompany like Airbnb where theres plenty [in the public record] to research.

TC:Before we wrap this up, whatare the handful of things you absolutely need to go public in this market?

LB: You need to be able to forecast your financial results; you can get out otherwise, but it wont look pretty three to six months later.

You need to have your team in place. If the team is in flux, it just makes things that much more challenging. Its not uncommon to see CFOs change within the year, but thats far from ideal. And certainly, the CEO and head of sales should have been there for a year. Youre in a much stronger position if your team has been there for a year or more.

Be able to tell you storyin a succinct way that will appeal to investors. So many management teams are excited about their technology that they forget to talk about how the application of that technology that will generate P&L over time.

Be able to tell a credible story about how your numbers will improve over time. People who make their operating margins look their very best at the IPO only have one direction to go.

Convey to investors that youre attacking a very large market. Otherwise, theyre going to wonder why youre going public and not an acquisition target.

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