Bleeding Edge

An All-Weather Captain always does three things when hit with a storm while sailing the high seas on an Ocean crossing, or when circumnavigating the Capes of Hope, Fortune and Despair…

Today when all hell has broken loose upon the financial markets and the people run for the lifeboats — we can’t all start rearranging the chairs for the orchestra playing Saturn’s Musical Maneuvers in the Dark…

What a Good Captain does, is set the course of survival — before the SOS radio-signal is sent out to the world, and hopefully well before the lowering of the lifeboats.

Similarly, a CEO of a high-growth StartUp company ought to ditch unrealistic goals, cashflow, market share, and world domination for simple survival, because all else pales in comparison to keeping the enterprise afloat.

All hands at the pumps and trimming the sails is a good first step, followed swiftly by a serious Course Correction, away from the storm, in any direction that offers safer passage.

Regardless of the already set course — in times of peril — you must first ditch the “All is Well” attitude and other unrealistic goals and focus on the only significant goal, that is SURVIVAL. Because without survival there can be no victory.

Captains, CEOs included, know full well that the idea of “overnight success” is for the storybooks, and that skippering inside the intense storms is what distinguishes a Good Captain from the holiday maker, gin-palace, aficionado cruise-line captain.

It is important to also visualize the long term and to give the crew a solid vision of what the future holds, whether we follow the old course or the new course, or whatever course will get us out of the storm and into the path of coursing calm seas, seeing blue skies and green islands ahead, with ports and arsenals to refurbish and refresh our provisions via good Chandlers and procurators.

And when we get there — we contemplate the next part of the journey.

That is what a Good All-Weather Captian does and the same os expected of a good all-weather Chief Executive Leader.

However, we must also know that having survived the storm successfully harbored in a safe port — there is no better time than the middle of a stormy market downturn, to start planning for the leap to the next island.

And in the case of hyper growth Startups, the leap to the next fiscal island, is going from a private hyper growth Startup to a young and robust Public company.

 Now that journey is full of peril as well… and we hope to be prepared to avoid the obvious pitfalls, and that is why this litany of events seems to cover it, like a good nautical chart, and a decent compass accompanied by an ancient astrolabe, gives you a great chance on the course to your chosen destination. And because that is the stuff that dreams are made of — here are a few examples of how we can avoid sinking the boat on the path to going public.

Naturally this requires strategic planning, which takes much provisioning, energy, treasure and time.

All young companies with ambitious goals to go public in less than three years, or as soon as the window of opportunity opens up again — must presently plan for it, despite the downturn and the sour market sentiment.

Some of us of course like the sour taste of today’s markets, because it is easier to profit from the hordes of meerkats going full speed over the cliff, but that is like shooting fish in a barrel.

For the real Gentleman, or Gentle Woman Player — now is the best time to get a head start in this race to navigate the course towards the Open Liquid Public Markets.

Let’s explore why this adverse economy is ideal for planning an IPO and what to do about it.

VCs, Institutional & Growth investors have all pulled back… sitting on cash and giving the banks undeserved windfalls, while the Startups suffocate for lack of growth capital.

Private fundraising levels have declined across the U.S. from a record-breaking 2021 to a dismal looking 2023. Unsurprisingly, late-stage companies have experienced the brunt of this blow.

Market experts are currently encouraging leaders not to pin their hopes on venture capital dry powder, even though there’s plenty of it. As the graph below indicates, the size of late-stage funding rounds has shrunk.

However — while some companies delay their IPOs, other smart ones use this storm to play catch-up and prepare for the time when the open markets feel ready to invest again in growth, economic progress and prosperity.

 

Although few enjoy market downturns, how this one unfolds can deliver insights to late-stage companies that pay attention. On one hand, many leaders are embracing the message of the Sequoia memo. We can agree with their ideas to prioritize profits over growth — scaling is different from what it used to be, and we must swallow that jagged pill.

On the other hand, cost-cutting and giving up hope of fundraising isn’t all doom and gloom. After all, when there is money to be found, some innovative founder will find it. We see it every day; only now, the path looks different.

As expected all Stormy Market downturns spur significant valuation corrections…

Course-correcting is a concept frequently discussed amid market downturns. The pendulum swings one way for a period, then begins its journey toward a more balanced standard. In this case, the open market thrived on bloated valuations — most startups were overvalued before 2021.

Furthermore, many stated that 2021 was a miracle year, especially as VC investment nearly doubled to $643 billion. The U.S. sprouted more than 580 new unicorns and saw over 1,030 IPOs (over half were SPACs), significantly higher than the year before. This year has only welcomed about 170 public listings.

However, experts argue that in the wake of a devastating pandemic, market expectations and the valuation model inflated valuations. Investors, leaders and employees were riding a wave that would soon be flushed in the second half of 2022 as severe valuation corrections took hold and inflation scared heads into the sand.

What does all this mean for high-growth companies?

Find another path to fundraising…

If late-stage companies can’t source funding from private investors, the open market could be the next best place to look to. The dynamics of the current lag in growth funding makes filing for an IPO seem more attractive and realistic — that’s the message of hope.

It only makes sense that people lose their appetite for IPOs during market downturns, and investors are also bound to rethink risky investments. Although IPOs might be off the table currently, 2023 will be jam packed with first-movers.

Sensible companies are starting thinking of their public path NOW.

And here’s why:

Historical data, gives us the benchmarks that signal an upcoming IPO season…

Private financing isn’t the only route to fundraising, but it’s the path many private companies think is the next logical step. This strategy is great when it works out, but like all strategies, it only leads to setbacks when it doesn’t.

Don’t leave money on the table by not going public, especially when growth investors hit the brakes. Remember that the IPO market will bounce back once investors stop running for cover.

Companies go public for the wrong reasons frequently, and it’s often a train wreck. However, when you have a proven growth strategy and there’s appetite in the market, filing for an IPO is often the next logical step, regardless of whether going public was part of your initial plans.

Over the past year, the Life Science, Information Technology, Healthcare, and Construction industries saw significant growth. Hopefully, some leaders of companies in these sectors will see the shift in the winds by eyeing the telltale signs that signal an opening of the IPO window in their future…

And here are some of the key benchmarks for these telltale signs:

• Market appetite: The product line & company market fit is spot on.

• Financials: Uptick indicators, red v black, and all of company’s financial intelligence; signals ongoing growth.

• Revenue: Consistent growth potential supports the Company’s equity story.

• EBITA: Above-average margins point to premium valuations.

• GAAP standards: Sophisticated handling of financial statements paves the path to an Initial Public Offering.

• Compensation plans: Forming your key team requires establishing long-term practices, incentives and rewards now, along with generous employee compensation & incentive plans, that will stand the test of time.

• Total debt: Disclosing all existing and future debt, for the time of the IPO and immediately thereafter, helps investors understand and leverage your capital structure. 

• Separate financial statements: Companies ready to IPO have audit-ready reports.

For high-growth companies that need to reach these milestones, a down market is a fantastic opportunity to get their ducks in a row and swiftly drive them to a safe harbor. While operations don’t necessarily need to be flawless right now, having IPO-ready goals is vital to setting off on the path to profitability and the Public Markets liquidity.

Of course — you ought to be creating a powerful IPO team, starting now, and that takes significant time…

Start the process of introspection right now, because performing your own due-diligence, during a market downturn is like viewing a potential home alongside your realtor, just after a terrible wind, hale & rainstorm — it’s a tell-all situation, that only the best will pass the test.

Think like a Buyer of your Equity, much like when buying a home, and the investors will appreciate the thoughtful connection.

As you likely know, filing for an IPO is a painstaking process that requires having the right people in your corner. Strangely enough, the best time to understand their actual skill sets is when things aren’t comfortable or going as planned, such as during a recession.

Furthermore, assembling an IPO team involves attracting “critical hires.” These people will manage the necessary forms, reports and statements. A word from the wise: audit your team before filing for an IPO and choose individuals who’ve either been through the process before, or are open minded and willing to learn the necessary lessons by serious study of the process…

These people might include:

• SEC consulting team
• Legal counsel
• Finance and accounting team (i.e., director of finance, CFO, etc.) 

• Information technology
• External auditors
• Tax firm & Government Relations

Also, late-stage companies must refine their equity story — the narrative weaving together the financial history and the story of the business. Engaging with the right investment bank will also bolster an organization’s credibility and soften receptivity.

Remember, due diligence with an underwriting partner is a two-way street, but downturns will help leaders read between the lines, both on the news of the day, as well as the long term value/investment algorithm, that is the basic thesis of your own general management.

And because the All-Weather Skipper’s navigation plan, requires savvy course corrections, serious star gazing and wise strategizing … you ought to be able to use the tools of the trade, such as your moral compass, your astrolabe and your ethical principles, consistently and effectively, because the leadership DNA will imbue the company and provide the actual future framework of its growth, life and legacy, along with the epigenetics of the soon to be Public Company.

This is an obvious axiom, that will impact the whole of your community, your employees, as well as the society in general, for the entirety of your Company’s existence.

And if you allow yourself to think clearly here, you will remember the top ten company names that are not with us anymore, and yet have created a path to the future for many others — through their investments, their strategic growth and their patents or open source knowledge so that they have spawn whole new industrial knowledge and production sectors and even industries…

And regardless of all the dismal news out there — there is a lot more positivity in our world today, so that we can safely say that Yin outweighs the Yang, nor vice versa

And the recent signs of softening of all those negative activities across the globe — our coming Renaissance has lifted the spirits of both the private and the public sector companies, as well as all those that seek to become great new entrants into the Public Markets.

Fortunately, market pricing is catching up quickly. Company leaders can more comfortably relaunch their IPO plans in light of these trends. Plus, the recent lack of IPO activity will impact insurers that want to write this business and force them to become more competitive.

Still, building a strong D&O tower takes time, as seen in the timeline below.

Several factors can impact a company’s road to the public markets; including:

• Market cap
• Industry
• Size of the offering
• Trading market (i.e., OTC, Nasdaq, etc.) 

• BOD composition
• Risk tolerance
• Limits
• Structure
• Coverage needs

The relationship with the SEC is important to be managed professionally, because that is a crucial task for the leadership team and not for just outsiders, hired counsel, or specialists, from the investment banking community.

SEC is an agency much like the FDA and the EPA that provides the Good Behavior Standards that we all need to adhere to, and it is an important ingredient to providing us with the signposts, the railings and the speed limits on this roadway that we traverse towards our Initial Public Offering.

The SEC regulations are to be studied, learned and understood by all the Leaders of companies on their path to going public; so it’s imperative to become familiar with ever-changing SEC standards and common requests regarding S-1 filings and all other regulatory retention examinations.

Aside from all that, please respect the Market, your Customers, your investors and above all else your employees — because without their nod of approval all of this is for naught.

Good Luck & God Speed

Yours,

Dr Churchill

PS:

In Summation:

Market downturns might not be the time to scale as usual, but they’re undeniably the ideal time to plan for an IPO. With growth investors reining back their investments, consider if you can hit key benchmarks and build an IPO network successfully.

Finally, while some companies delay their IPOs, others can play catch-up and prepare for the time when the open market itches to invest again. Companies that keep due diligence and legal documentation moving forward during a crisis can face the open market more confidently when the timing is right.

And lastly — it is important to think like Marcus Aurelius every morning that you wake up:

MEMENTO MORI