Knowbella Tech

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How An IPO Really Works

IPO fever is definitely back in the tech world. Some of the recent deals include DocuSign, Smartsheet, Pivotal Software, Zuora, Dropbox and Zscaler.

Yet the IPO process is often mysterious and misunderstood. So to get a sense of how things really work, I had a chance to talk to Howard Lerman, who is the founder and CEO of Yext. His company is the leader in Digital Knowledge Management (this involves applying algorithms to public facts so as to boost revenues and find business opportunities) and the customer base includes large enterprises like Arby’s, AutoNation, Marriott and T-Mobile.

Back in April 2017, Howard took Yext public on the New York Stock Exchange, raising $116 million. The lead investment bankers included Morgan Stanley and J.P. Morgan.

Okay, then what was the experience like for Howard? Well, let’s take a look:

#1- Pre-IPO Preparation

Despite recent loosening of the rules, an IPO still involves many regulations. Because of this, Yext started building the compliance infrastructure two years before it pulled off its own offering. This meant hiring a strong team with public company experience. There was also a need to hire a top audit firm.

Basically, before Yext sold shares, the company was already operating as if it were public. “It’s amazing the kinds of systems you need to put in place so you do not have any material weaknesses,” said Howard.

This also meant that millions had to be spent. This is why a company needs to reach a certain scale – such as over $100 million in annual revenues – to be a viable IPO candidate.

But there are certainly key benefits of an IPO. “Being public has always been our destiny,” said Howard. “We do not want to favor one company or brand. We need to be independent, like Switzerland.”

The IPO was also a strong marketing event for Yext, especially in terms of getting the attention of prospects outside the US. It also got easier to work with larger companies because of the credibility from having to disclose ongoing financial information. And yes, the liquid stock provided more flexibility with employee compensation.

#2 – Testing The Waters And The Roadshow

The “testing the waters” phase involves a two-day period of meetings to gauge the interest of investors. Think of this as a practice roadshow. A company can also do this without having a lead investment banker.

“You’ll have eight meetings each day,” said Howard, “which is a good practice round. The meetings can also be an eye-opener. You’ll soon realize that public company investors have a much different approach versus venture capitalists. A VC is much more about the long-term and often gets involved in the strategy and operations, such as being a part of the board. A public company investor, though, is much more short-term focused. He or she may also see your deal in two ways. Should I buy? Or Should I sell the stock short?”

While this can be unnerving, Howard considered the meetings to be extremely helpful. He also realized how important it was to have a strong CFO. “Public company investors have a deep understanding of the financials,” he said.

After the meetings are over, you will get a run-down of the interest from the investors. And if it is strong, then the company will go on a roadshow, which will last 2 weeks or so. Much of it will be focused on the major cities in the US but there may be meetings in Europe and Asia (Yext had one in London).

“The roadshow is a whirlwind,” said Howard. “But you’ll definitely get to know your pitch well. Your investment bank will also provide a jet, which is nice.”

He also had an app that showed – in real-time – the interest from investors.

#3 – The IPO

During the evening before the shares are sold to the public, the senior managers of the company and the investment bankers will have a pricing meeting – which can be tense. Keep in mind that it’s a tough balance to get a good price for investors but also trying to find the best deal for the company. In the case of Yext, the company priced 10.5 million shares at $11 each. The stock would then end the day up 22%.

“During the morning of the IPO,” said Howard, “I saw the banner of our company hanging in front of the exchange. This is when the moment felt real.”

And it was a busy day, of course. He rang the bell, met lots of people and had interviews with various media outlets, such as with CNBC.

“Despite all the excitement, it’s important to realize that an IPO is not an end in itself,” said Howard. “The focus must continue to be to serve employees, customers and shareholders. So the next day after the IPO, we went back to work.”

https://www-forbes-com.cdn.ampproject.org/c/s/www.forbes.com/sites/tomtaulli/2018/06/10/how-an-ipo-really-works/amp/