Technology startups can get so wrapped up in developing their product or service and trying to recruit top talent that they neglect to invest in their future in other critical ways. Specifically, they overlook — or simply put off — building their financial reporting infrastructure, particularly their financial and system controls. And that could cost them big in the long run.
For one, neglecting these infrastructure necessities can hinder the ability to launch an initial public offering (IPO) when an ideal but narrow time window presents itself. It can also make the business a less attractive target for acquisition should that be the exit strategy. If the firm doesn’t have an experienced team in place for financial planning and analysis (FP&A) and forecasting, it could easily end up setting unrealistic goals for financial performance — and potentially disappointing investors post-IPO.
Any emerging tech firm operating in today’s fast-changing landscape may want to develop its game plan for public company transformation sooner rather than later. Even if an IPO is only a “maybe” on the horizon, it can be a smart strategy for these businesses to proactively address the numerous technical and legal requirements they will face if and when they do go public. This preparation can help tech startups stay nimble and avoid unnecessary costs and frustration in their readiness efforts later.
Here are a few questions that emerging technology companies may want to weigh as they formulate their game plan for going public in 2019 or beyond. These questions can be a good starting point for assessing current resources and potential needs and formulating next steps.
Ask yourself:
- Are our planning, forecasting and budgeting processes sufficient?
For most tech startups, the answer to that question is, “Probably not.” Like many private companies, they may lack automated tools for handling these key processes, which they also may perform on an ad hoc basis. More than likely — and understandably — they are much more focused on establishing their leadership team and investing in their product build-out.
However, public companies need to have more sophisticated planning, forecasting and budgeting processes that are managed by skilled talent and supported by robust technology. The failure to fully develop sound business processes and IT infrastructure (and controls) to support financial reporting processes is a common but avoidable mistake that many pre-IPO companies make.
- Do we have the right financial team in place?
Skilled talent is a must for ensuring that core financial processes are well-executed. But as noted earlier, it’s especially important for emerging tech firms to have a strong team in place to handle FP&A and forecasting. That team can help the business reduce the likelihood of shareholder dissatisfaction if post-IPO financial performance falls short of the forecasted performance. And, rightly or wrongly, tech startups do tend to face much more scrutiny from investors in their early IPO days than more established firms in nonemerging industries.
Emerging tech firms may also want to consider laying the foundation for an investor relations (IR) function early. They might hire an in-house IR executive, have an external team that’s on call, or both. Establishing the IR function now can reduce pressure on other company executives later. Typically, emerging firms will assign senior executives to head the IR function during the readiness process as well as just after the IPO. But if an IR team is already in place, it will allow these leaders to focus more attention on other activities that contribute to business success.
- What other resources should we align in advance of an IPO?
Tech startups, long before they decide to explore an IPO, may want to seek out a Public Company Accounting Oversight Board (PCAOB)-qualified external audit firm. They may also want to find a company legal counsel well-versed in securities laws and U.S. Securities and Exchange Commission (SEC) rules and regulations.
Both of these resources are critical: Having an external audit firm whose work can be included in securities filings is an important step toward readiness. And the legal counsel the company selects for an IPO transaction will take the lead in managing many aspects of the IPO process. Forging a solid relationship with these resources now can prevent an emerging technology company from scrambling at the last minute to develop these relationships and potentially choosing resources that aren’t the best fit for the business.
- Do we need to adjust the composition of our board of directors?
Many young and fast-growing tech firms have a board that consists of the company’s founders and its angel and venture capital investors. As these firms start to mature and eye the IPO path, they will want to start thinking more about what type of board will support them best into the future. Tech companies in California, for instance, may be required to increase their board diversity.
Tech startups should also consider evaluating the depth and breadth of financial reporting expertise and management experience that sits with their current board. Any business that wants to go public will need board members who can establish and serve effectively on audit and risk committees, compensation and nominating committees, and other working groups.
Emerging technology companies may want to make succession planning a priority as well. If leadership control is currently centered with one founder, for example, what would happen if that person suddenly left the company? Another important question to consider: Is the board strong enough right now, with its current composition, to provide adequate oversight of the chief executive, who is also a major shareholder? Keep in mind that as the company grows and evolves, even if it doesn’t go public, it may one day require a different type of leadership.
For tech startups, growth is a priority — and that includes building a solid foundation to support long-term business success, regardless of whether the company goes public. These emerging companies, if they want to be counted among the responsible technology firms of the future, will need to be just as adept at corporate governance, risk management and compliance, and corporate social responsibility as they are at technical innovation and delivery.
For tips and insights on how to prepare for an IPO, see the latest edition of Protiviti’s Guide to Public Company Transformation. Also read additionals posts on The Protiviti View related to IPO preparedness.
