SaaS IPO Guide and Expert Advice in 2023
Is your company ready to go public? It’s a difficult question to answer with many different variables coming into play. But once you get beyond your Series C, you should be evaluating the path to an exit regularly. Here’s what you should know about the IPO process and current state of public offerings in 2023.
If you spend any amount of time watching the public markets, you might know that IPO events are hard to come by right now.
As companies that IPOd in 2022 struggle to perform and interest rates continue to soar, it’s tough to envision a major uptick in IPO activity at any point in 2023. As one Crunchbase reporter wrote, “[in 2022], tech IPOs slowed to a plodding walk. In 2023, they’re down a crawl.”
That may sound bleak, but in many ways this is the perfect time to prepare for an IPO.
If your business has been trending toward a liquidity event but is currently stalled due to public market performance, take advantage of the opportunity to get your affairs in order. Here’s what you need to know about the IPO process and how to execute effectively.
The Investor Due Diligence Checklist
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What Is an Initial Public Offering (IPO)?
An initial public offering (IPO) is a liquidity event in which a private company offers shares to the public market for the first time so that it can gain an influx of equity capital from its first issuance of stock.
This type of liquidity event is referred to as an exit because it gives earlier investors an opportunity to convert preferred shares into public stock according to the strike price from when they obtained the equity. Pre-IPO beneficiaries include angel investors from pre-seed and seed stage funding, venture capitalists from Series A, Series B, and Series C+ funding rounds, and employees who received incentive stock options (ISOs) when they were hired.
The IPO process marks the official transition from private company operations to life as a public company. And that transition unlocks a whole new world of access to capital that you can use to further grow your business.
How Does the IPO Process Work?
Part of growing into a public company means increasingly adhering to regulatory requirements and more rigid processes. That’s why you’ll see a standard set of steps to the IPO process regardless of where your research takes you.
The timeline for these steps will vary from company to company. On the short end, you could go from prep to public in six months, with companies falling in the nine-month to one-year range more often. However, a company like Dropbox took upwards of 18 months to complete the process in an effort to ensure the company was 100% ready.
According to then-CFO Ajay Vashee, “you can go faster, but that comes with some level of risk” because even one misstatement could diminish investor confidence and cause your IPO to fall flat.
Before worrying about how to move faster, get familiar with the following steps of the IPO process.
1. Choose Your Underwriter
The IPO process runs through your underwriter (or underwriters), which is an investment bank of your choosing. They act as the guide through each of the steps toward an IPO in exchange for a certain percentage of equity capital once the liquidity event is complete. You’ll create an underwriting agreement with the investment bank that lays out the terms of that exchange.
As you choose an underwriter, consider their experience in your specific industry and market segment. It often makes all the difference in how smoothly your IPO process goes.
2. Facilitate Due Diligence and Audit Processes
The underwriter and a broader IPO team of third-party accountants, lawyers, and expert advisers on SEC regulations begin a deep dive into every aspect of your business and its financials. Their goal is to identify potential regulatory issues, audit financials for public market readiness, and uncover potential risks that need to be addressed before the IPO.
3. Create and File your S-1 and Other Required IPO Documentation
After the due diligence and auditing processes are done, you and the IPO team have to prepare documentation and file it with the SEC. You should already have a few key documents in place: an engagement letter from when you first chose your underwriter, the letter of intent that outlines the proposed deal between you and your underwriter; and the underwriting agreement with price confirmation.
But beyond those initial underwriting documents, the Form S-1 Registration Statement is the major piece of documentation you have to submit. The S-1 is a prospectus on the offering you plan to bring to the public market. In the pre-IPO phase, it is often called a Red Herring prospectus because the S-1 and pricing details are not yet final. The S-1 prospectus includes insight into:
- The company’s history and business model
- The management team and their unique qualifications
- Performance across all financial statements with historical data since the company’s founding
- Risk factors for the business, including competitive forces and other external headwinds
- How the company will deploy the capital it raises in the IPO
4. The IPO Roadshow
Think of the roadshow as a series of marketing events meant to generate interest in your upcoming IPO. Your leadership team and the underwriting firm travel to major U.S. and give presentations about company performance and its potential to return dividends as a public company.
These roadshow presentations have traditionally occurred in person but have been increasingly digital in the wake of the global pandemic in 2020. Whether in-person or virtual, roadshow presentations will often include:
- Introduction to the leadership team
- Overview of company mission and unique value
- Historical financial performance
- Forecasted revenue growth and potential return on investment
- Target stock price
An effective roadshow can make or break the success of your initial offering. The best presentations will generate enough buzz to push the market debut to the highest price possible.
5. Finalize the IPO Price
The underwriters and broader IPO team set the share price and the number of shares for the public offering once the SEC has approved your filing and there’s an understanding of investor demand from the roadshow. They determine the offering price based on that demand as well as your financial performance.
6. Release Public Stock and Stabilize
After you complete the five previous steps, you’re ready to release your stock to the general public. The underwriter releases shares to the market on an agreed-upon first day of trading. There’s then a 25-day period in which the underwriters can stabilize the price, often by purchasing shares in the secondary market.
Are You Ready to Go Public? Expert Tips for a Successful IPO
The multi-million dollar question around the decision to IPO is whether or not your company is ready to go public. And while technically there are no revenue requirements for going public, there are a few questions you should ask yourself to ensure you’re ready to debut on the stock market:
- Can you forecast the financial performance of your business accurately and consistently?
- Do you close your books on time, every time? And would you be comfortable if they were audited each time?
- Are you comfortable with the valuation of your business as it stands today?
- Are your historical metrics rate and expected future growth rate attractive enough to generate interest among investors?
- Do you have a clear outline for how your company will deploy the capital it raises in an IPO?
For more specific insight into how to successfully IPO, we talked to Ajay Vashee. He joined Dropbox as a finance leader when the company was just 100 employees, helping it grow to 2,800+, nearly $2 billion in revenue, and an IPO in 2018 worth $9.2 billion. His tips should give you a more practical idea of what it takes to bring a SaaS business to the public market.
Make Big Moves to Address Risks in the Run-Up to IPO
It’s impossible to eliminate all risks from your business. But addressing some of the biggest concerns investors might have about your business will show that your company is worth betting on. That’s why Ajay and his team partnered with engineering to address one of Dropbox’s biggest risks before going public — its gross margins.
Dropbox had long been a 40% gross margin business, well below what you might expect from a software company. Finance and engineering partnered to identify cloud hosting costs as a blocker and devised a plan to move from public to private infrastructure. The result was an increase from 40% to 80% gross margins and a major spike in investor confidence among individual investors and institutional investors.
Financial trajectory-wise, it was great to show a path to doubling margins because it made investors more curious about our business model and operations. But walking them through the story of how we developed the conviction to make a decision like that became an important way to build investor confidence as we prepared for IPO.
Act Like a Public Company Before You Are One
One of the biggest challenges of IPO is keeping up with the major shift in operations between being privately owned and publicly-traded. Going through due diligence and audit processes isn’t enough to get you prepared for life after IPO.
Instead, Ajay and his team spent the ten quarters leading up to their IPO simulating the reporting and forecasting cadence of a public company. Commonly called the beat-and-raise cadence, it’s the rhythm of forecasting financial performance, beating those results, and raising the bar for the next period. That’s what it takes to perform at a high level consistently on the stock exchange.
The rigor and discipline necessary to hit that rhythm are difficult to maintain in the long run. Getting practice ahead of time when there’s less external scrutiny will help you get ready.
Bring on New Leadership to Add Public-Company Experience
One thing Ajay talked about was how important it was to bring on the right leadership hires in the finance org to fill gaps in his own experience before going public. There’s no one-size-fits-all set of leadership hires you should make. But these three proved critical to Dropbox’s successful IPO:
- Chief Accounting Officer. Someone with public-company experience who had gone through multiple IPO processes. The corporate accounting background is critical to maintaining the books as a public organization.
- VP of FP&A. Forecast accuracy and strategic planning are critical to maintaining a positive outlook among investors. This hire took on that responsibility for Dropbox with a deep level of operational knowledge in the software space.
- VP of Corporate Finance and Strategy. This was what Ajay called the “quarterback of the IPO process.” Someone with an investment banking background to work on the inside and provide the perspective from the other side of the table.
What are some alternatives to IPOs for companies seeking to raise capital?
There are two primary alternatives to the IPO process if you want to go public.
- The SPAC route. Special purpose acquisition companies (SPACs) essentially go through the IPO process on their own to raise capital and acquire the controlling stake in an organization. Instead of you going through an IPO, you become a public company by virtue of being acquired by the SPAC.
- Direct listing. Also known as a direct public offering (DPO), a direct listing is a way to go public without working with an investment bank to underwrite the process and act as the issuer of stock. It’s faster and cheaper than an IPO. But you lose the protection and expertise of the underwriter, which puts your entry into the open market fully at the whim of market demand. Squarespace is one company that did a direct listing rather than an IPO.