Written by Part 3 of 5 of How to Have a Successful IPO and Beyond
The IPO process is made significantly easier by efficiently producing financial statements, so there’s significant value in investing in systems (and automation) that can deliver global consolidation and financial reporting. Yes, we are finance people but spend the money, it’s necessary to have a robust system.
By eliminating manual inputs, a company can scale more effectively as the business grows in volume. And, by ensuring that reporting processes are transparent and supported by full audit trails, a company will reap dividends throughout the IPO journey.
Analyzing past performance and predicting future cash flow and performance requires investments in a system that can harness business intelligence and analytics.
Investors seek assurance that the data that is driving the metrics like Net Dollar Retention Rate (NDRR), Growth in Revenue Performance Obligations (RPO), and Cohort Analysis is not only robust but can be readily audited for credibility.
Don’t You Dare Miss Your First Quarter
It goes without saying that you need to beat and raise your first quarter as a public company. Have enough cushion and manage expectations appropriately to hit the numbers as if you miss the first quarter, your stock sticker will be wiped off the portfolio manager’s screen along with your market cap.
We discuss ways to properly manage expectations in our article here: Dont Miss!. The gist of it is that you need to develop a robust financial forecasting model that takes into account various revenue streams, expenses, and market trends. Regularly update this model to reflect changing conditions and adjust strategies accordingly. Remember you are building confidence and trust with the investors so beat the numbers and raise the guidance for heaven’s sake.
Net Dollar Retention Rate: The One Metric to Rule Them All
Even smaller companies can excel in SaaS metrics through rigorous auditor collaboration. An exemplary case is Twilio, a cloud communications platform. Twilio’s meticulous approach to financial reporting and data-driven metrics has garnered investor trust. By working closely with auditors, Twilio ensures the accuracy of its NDRR and other SaaS metrics, providing a transparent view of its customer expansion efforts and underscoring its growth potential. If you can get North of 140%, you are in fantastic shape.
Growth in Revenue Performance Obligations (RPO)
Auditing Future Revenue Visibility: Examples to Consider
PagerDuty, a smaller company specializing in digital operations management, has demonstrated the power of collaborating with auditors to validate its metrics. PagerDuty’s focus on RPO highlights its commitment to transparency. By partnering with auditors to validate revenue commitments and obligations, PagerDuty provided assurance to investors of its forward revenue visibility, reflecting a strong sales pipeline and revenue potential.
Cohort Analysis: Auditing Customer Insights
Smartsheet, a smaller company in the collaborative work management space, exemplifies how close collaboration with auditors can enhance Cohort Analysis. Smartsheet’s attention to auditing customer behaviour data ensures that its
Cohort Analysis accurately reflects user trends, preferences, and retention patterns. This collaborative effort instils investor confidence in the company’s ability to translate data-driven insights into strategic decisions.
Best in Class SaaS
Small companies can showcase best-in-class SaaS metrics by integrating data rigorously audited in collaboration with their auditors. Learning from Twilio’s NDRR accuracy, PagerDuty’s RPO transparency, and Smartsheet’s Cohort Analysis precision, businesses of all sizes can understand the value of working closely with auditors. This collaboration not only ensures accurate data inputs for SaaS metrics but also establishes investor confidence in a company’s growth potential.
By leveraging auditor expertise to validate data-driven insights, companies can confidently embark on their IPO journey, demonstrating their readiness for the public markets.
Examples of What Not to Do
Zynga: Farmville Woes
Social game developer Zynga looked destined for IPO glory given its impressive growth and popularity (hello, FarmVille!), but its public debut was a letdown. The Silicon Valley startup IPO’d in late 2011 at a modest $10 a share. Given that it was valued at $7 billion, one might think the only way forward for Zynga shares was up, but the stock just kept tumbling down 74% in its first year.
The big issues were the Facebook migration, moving beyond Farmville, and the long migration to mobile. Zynga is still around today — and still on the market — so surely, things didn’t go as badly for it as it has for others but its slippery IPO has been far from inspiring.
Groupon: Big Flaws
In early November 2011 when Groupon made its Wall Street debut at $28 per share — with a market cap of $17.8 billion — it was the largest U.S. internet company to IPO since Google. It all went downhill from there. There’s no shortage of reasons as to why this IPO went bust, but perhaps the most fatal flaw was Groupon’s focus on acquiring new customers rather than retaining its base.
In its first year on the market, Groupon saw an 85% plunge in the price of its shares. The company has climbed back up in the years since, but the pandemic has introduced extreme challenges. When the company announced in April 2020 that it expected to lay off or furlough more than 40% of its staff, shares slid again. Right now the stock is still treading water in the mid-teens.
Robinhood: the Worst Debut Ever for IPO of Its Size
Robinhood wanted to make history with its initial public offering, and it did — for the wrong reason. Shares in the broker behind the meme-stock revolution fell 8.4% below the IPO price in the company’s first trading session. That’s the worst debut on record among 51 U.S. firms that raised as much cash as Robinhood or more. Robinhood had the largest decline for an opening trade since Uber.
Subsequently, Robinhood’s stock price fell as much as 82% to $6.81 last June from the $38 IPO price as the company became, in the words of a JPMorgan analyst, “a growth company without the growth.”
No Love for LoveSac
In June 2023, the company’s Audit Committee began an internal investigation related to the recording of last-mile shipping expenses. This came after discovering a journal entry that incorrectly capitalized $2.2 million of shipping expenses for the quarter ending April 30, 2023. Ouch.
In Part 4, we dive into “How to Establish Effective Corporate Governance for IPO Success“.
Make sure you have not missed anything on this journey of “How to Have a Successful IPO “.