Above the Crowd

On IPOs: If You Are Going To File, Make Sure You Price

September 14, 2011:

As you likely know, I am a big believer that the IPO can play a key role in the development of a company’s life. Moreover, I have argued that many in our ecosystem have an unhealthy anxiety regarding the dangers and consequences of being public. Lastly, I have argued that the IPO window is wide open for great companies – something I still believe today. All that said, I have been quite surprised by the recent trend in companies that file and then chose to delay. If you are going to file the S-1, it is imperative that you are prepared to follow through. Standing too long in the middle of the financial equivalent of the river Styx can have severe consequences.

Why is this a bad thing? The longer a company remains on file without pricing, the more questions arise about “why” the company may be struggling to move forward. Did they miss their numbers already? Are they having cold-feet? Are they not ready?  Do investors not like the company? Have the bankers lost their belief on the company? Employees may begin to wonder the same thing. As you are in a quiet period, it may be difficult for you to respond to concerns through the press. If you then take the added step and “pull” your IPO, you now risk being considered a “broken” deal and potentially a “broken” company. Potential acquirers will certainly see it that way. These problems can be especially acute in Silicon Valley, where competition for talent is intense. Lastly, to file and not price is to give up all the benefits of being private with none of the gains of being public. You have been exposed, but you have nothing to show for it.

There are many things that can cause delays in filed IPOs. The most common factor is unexpected questions from the SEC that cause iteration and re-filing. This is especially true of the SEC questions that require the auditors to revisit their original assumptions. Shaky investor sentiment as a result of a weak broader stock market can cause both investors and bankers to have “cold feet.” There may also be concerns with valuation and dilution. If your company looks like it is going to price at a 30% discount to what your bankers conveyed on filing date, you may not want to suffer unexpected dilution. Lastly, there may simply not be enough demand for your IPO – which is an amazingly tough position for your company.

 

The attached table shows the # of days from pricing to filing for some recent IPOs as well as the days on file for Zynga, GroupOn, and Kayak. These five companies had an average pricing-filing span of just under 100 days. Two of the IPOs in which Benchmark was lucky enough to be an investor (Zillow and ServiceSource) had particularly good showing on this “pricing-to-filing” metric with 93 and 94 days respectively. (*Just added Bankrate, which had an error-free 62 day filing to pricing window). GroupOn is starting to move outside this ban, but recent news suggests they may be back “on track” with a target date of late October (this would equate to 150 days on file). Zynga’s IPO is listed as “delayed” on Yahoo Finance while standing at 75 days. Kayak, a leader in the travel search space, had been on file for 301 days – a precarious position for any company.

While many of these potential causes of delay appear external and “out of your control,” there are in fact many things you can do to minimize the number of days between filing and pricing.

  1. Don’t start the process until you are ready. This certainly includes knowing your business is performing well, but also includes having the auditors ready, having your financials in order, having a strong CFO and general counsel, having your BOD ready to go, and generally being prepared for what is about to happen. Talk to other CEOs who have kept the process on time, and find out how they prepared.
  2. Pick a banker who understands that you are sensitive to filing-pricing timing. Some bankers will tell you this metric is not critical. You own the problem if you are stuck in a filed but un-priced company. You should tell the service provider what is important to you, not the other way around. Great investment bankers have a strong understanding of SEC process, SEC rules, and may even have an ex-SEC representative on staff. These things matter, and you should be able to tell whether or not they matter to your banker. Also, find out before you file if your banker believes in you and your business. If you are defending your business to your banker “after” filing the S-1, you had a clear sequencing problem.
  3. Watch out for “wedding planners.” IPO are expensive and as such, they tend to attract “service providers” encouraging you to purchase the “royal package” at every turn. The argument, just as with a wedding, is that you only do this once, and therefore; expense should be of little concern. There are two problems with this logic. First, companies about to be public should not be carelessly wasting money. Second, the “royal” package takes more time and slows things down, and will inherently contribute to extending the pricing-filing window.
  4. Pick experienced professionals in every slot.  There are many constituencies that are involved in your IPO process – auditors, valuation firms, compensation firms, external counsel, underwriter’s counsel, bankers, analysts, even these whacky constituents known as “printers.” You want professionals who know how to get things done, which is very different from the “wedding planners.” Think Harvey Keitel as Winston Wolf from Pulp Fiction. “I solve problems.” Facilitation is key.
  5. Intentionally target a smaller offering. Many investment banks will encourage larger offerings (see point 3). While this serves them well, it may be at odds with maximizing the probability of a successful pricing. Less supply means less demand is required to pull off a successful offering. A smaller offering also will make all shareholders less sensitive to dilution and therefore pricing. Once again, do not file if you do not plan to price, and this includes all prices in the planned offering range.
  6. Don’t disrespect the precious nature of an open window. The four companies above were on file during a very strong IPO window, and as a result had seemingly error-free processes. Being prepared to go when things are good means avoiding the situation where you file, and the global market melts down in your face. If (1) your company has the numbers to be public, (2) your company is ready and prepared to be public, and (3) the IPO market is healthy and the window is clearly open and you still chose to wait to go public than you are accepting the timing risk of the future.  As Geddy Lee of Rush says, “If you choose not to decide, you still have made a choice.” Growth can slow, markets can turn, new competitors can show up. Going public too early clearly has risks – but so does waiting too long and missing your opportunity.

IPO markets will always have “pulled” and “delayed” IPOs. This is simply the nature of the beast. An open IPO window attracts two types of companies – those that should go public, and those that “need” to go public for capital reasons. Portions of the “need” group will always fail to find supporters, and therefore you should not view delays and withdrawals as signs of a weak IPO market. That said, certain delays can and should be avoided. If you are stepping up to the plate for an IPO, be ready, be prepared, and be committed to seeing it through. Don’t submit an S-1 if you don’t plan to price. Waiting on file for extended periods of time can be catastrophic.

9 Comments

  1. ALEX TONG September 15, 2011

    Credit should be given to Neil Peart for this.
    “If you choose not to decide, you still have made a choice.”

    Reply
    • Liam September 16, 2011

      Good correction.
      Though credit is due for Pulp Fiction and Rush references in the same blog post.

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  3. Mark September 15, 2011

    Are you pulling punches here because of your desire not to offend anyone? Or are we supposed to just read between the lines: Things are not right at Groupon (and Kayak, apparently).

    I’m also not persuaded by the mini chart. Two of those four companies don’t really belong on the public markets. They are there because funds that invested in them are old funds and wanted them off the books. Neither company has demonstrated a clear path to long-term profitability. Yes, they took advantage of a wide-open window, but to what end? It’s harder for someone to buy Pandora now given that the anchor is the current stock price — and it’s harder to buy a public company anyway. And Pandora has shown little to prove it can build a sustainable, profitable model. It needs to be part of Apple or Google or Spotify, where the leverage might ultimately be fairer.

    Reply
  4. ZUrlocker September 15, 2011

    Great analysis on a complex topic. Having gone through the process once, it’s nice to get the VC perspective. Thanks Bill!

    Reply
  5. Andrew Ullman September 16, 2011

    Interestingly, Morgan Stanley is lead bookrunner for all three delayed IPOs. They worked on LinkedIn and Pandora but that’s a blemish their ECM group isn’t going to want to explain to potential clients.

    Reply
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