Panel discussion: CFO perspectives on IPOs and life in the aftermarket

David Spitz, Managing Director, KeyBanc Capital Markets Technology Group, March 2020

Preparing to become a public company - experienced CFOs provide decades of insights.

The CFO’s Perspective Before and After an IPO

At KeyBanc Capital Markets® (KBCM) 15th annual Emerging Technology Summit (ETS), a panel of chief financial officers (CFOs) from leading technology firms offered their perspective on IPOs and life in the aftermarket. Moderated by KBCM’s David Spitz, Managing Director of Software and Cybersecurity, the panel comprised:

  • Lee Kirkpatrick, former CFO of Twilio, a cloud communications platform-as-a-service company
  • David Faugno, former CFO of Qualtrics, provider of The Experience Platform™, and Barracuda Networks, provider of security, networking and storage products based on network appliances and cloud services
  • Alan Black, former CFO of Zendesk, provider of CRM software for support, sales and customer engagement

IPO or a Sale

Preparing to become a public company begins with the larger question of how best to make a business stronger in the long run. Operating with the controls and transparency of a public company opens the door to more options to create long-term value, whether through a public offering or a sale.

As David Faugno noted, Qualtrics was preparing for an IPO, but ultimately was acquired by SAP for $8 billion – significantly more than it expected to gain from an IPO. While the price was important to Qualtrics’ shareholders, what was equally important to the founders was the potential to leverage SAP to build the vision more quickly and on a larger scale.


Going Public in a Difficult Market

In a difficult market, is it wise to go forward with an IPO? When a company has a strong growth record, its IPO can succeed despite a down market.

For Zendesk, the decision wasn’t obvious, but the leadership team felt that it was ready, according to Alan Black. The company had a proven concept delivering predictable income, strong margins and impressive cash-flow efficiency. So, Zendesk’s leadership met with 350 public investors through non-deal roadshows and conferences before going forward with the IPO.

With year-over-year growth of 78%, Twilio delayed its IPO for several quarters before becoming the first technology company IPO of 2016. One factor in the decision was the advice of Black, who suggested that going public in a difficult market would generate buyside attention—which it did. According to Lee Kirkpatrick, Twilio’s CFO at the time, the visibility ultimately proved more valuable than waiting for a more positive environment.


How to Know When the Time is Right

While the conventional wisdom is that $100 million in annual revenue is the “magic number,” the panelists’ experiences showed that other factors can be just as instrumental in driving a successful IPO. As Black observed, what happens after an IPO is what matters to public investors.

In Faugno’s experience, the business factors that created the revenue stream are also critical. “What are your investment priorities for the business, and what will those investments yield in the short, intermediate and long term?” he said. “Sometimes the world changes on you.”

Predictable operations are just as important as predictable revenues, noted Kirkpatrick. Investors also care about how reliably a company can hire and onboard talent and how predictably it can create and deliver new products to market.


Revenue Growth vs. Profitability

While investors may be disillusioned by unprofitable unicorns today, profitability was less of a concern in previous eras. When Zendesk was preparing for its IPO, prospective investors wanted to know why the company wasn’t investing more of its cash into the business – why did it need an IPO?

“We said we didn’t need to go public to have the cash to run the business other than to be able to invest for the growth that we were actually experiencing,” recalls Black. “If you have a business that grows as virally as Zendesk did at the time, then you’re really responding to the growth that’s coming to you as opposed to laying down bets with the hope that the growth comes.”

Twilio, in contrast, was slightly below breakeven at the time of its IPO. However, the leadership team was prepared. “We wanted people to understand that we were going to invest in the business,” said Kirkpatrick. “We had good growth opportunities, but questions about profitability and long-term operating model were very important. Investors wanted to make sure we were going to be good stewards of capital.”


To Sandbag or Not to Sandbag

It’s a common practice to “sandbag” projected business results in advance of an IPO, to create excitement when results turn out far better than expected. But is it a necessary practice? KBCM’s David Spitz pointed out the difficulty of striking a balance between providing guidance that, even when truthful, sparks skepticism, versus overly conservative guidance.

At Qualtrics, the founders opted for a straightforward approach of controlling expectations with transparency. “I was very careful to describe our guidance philosophy so that the investors understood how we think … as opposed to leaving it to the imagination as to how much you’re sandbagging it,” said Faugno.

Yet, sandbagging can be counterproductive if a company has already demonstrated very strong growth. “You lose credibility if you’re trying say your business is very predictable and has performed at this level every time.” Faugno added. “If your story is a predictable business, you have to marry that with guidance that is conservative, but not ridiculous.”


Looking for the “Pop”

On the flip side of sandbagging is the sought-after IPO “pop,” when valuation increases on assumptions that a company has sandbagged its numbers. However, KBMC’s panelists observed that taking a longer view of company value is often more strategic.

As Kirkpatrick said, “What is more important: eking every dollar out of the IPO or thinking long term?”

Twilio, for example, offered only 11% of its shares in its IPO and was equally focused on the remaining 89% of the value of the company. Its leadership wanted to attract investors who understood the business, generating momentum and trading velocity to create enthusiasm on the part of investors, customers and employees. Following the IPO, Twilio later successfully pursued an additional $1 billion in financing. Ultimately, the company was rewarded with a significant increase in value.


The Right Strategy for Guidance and Metrics

After going public, a CFO may spend 15% to 30% of their time on reporting and communicating with investors. In Faugno’s observation, some investors will genuinely understand the company’s story, while others will be less astute.

Barracuda’s leadership spent significant time educating investors. “There weren’t many tech companies selling to small- and medium-sized businesses then,” recalled Faugno. “We were a pretty unique public company selling to that part of the market. Educating people about what we actually did and how our business worked was a lot of work.”

GAAP (Generally Accepted Accounting Practices) metrics may be standard, but non-GAAP metrics also can provide meaningful insights about a company. Twilio, for example, decided to straightforwardly disclose its variable revenue.

“You want non-GAAP metrics that are going to provide meaningful insight for investors,” said Black. “When we went public at Zendesk, it was very much around taking a company that had largely been in the SMB market into larger businesses. We began to introduce the growth that we were experiencing in terms of the number of larger customers.”

Founders need a different mentality to take their companies to the next level, advised Kirkpatrick. “It’s really playing to win. Getting a company from $0 million to $10 million, $20 million, $100 million—it’s a great accomplishment. But it’s a very different mindset to think really big and go for broad markets on a global scale. Do you have the right people? Are you playing to win?”

To discuss these concepts and insights in more detail, connect with your investment banker.


KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp® and its subsidiaries, KeyBanc Capital Markets Inc., Member FINRA/SIPC, and KeyBank National Association ("KeyBank N.A."), are marketed.

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