INSIGHT. 12/01/15

Don’t let Unicorns Fool you – The Tech IPO is not an Ancient Myth

By Bo Park, Managing Director & Head of Tech PR, ICR

Remember the market clamor about a possible tech bubble in 2014? It was a different time with dozens of successful IPOs and newly emerging unicorns – those hot private companies claiming valuations of a billion dollars or more. Analysts and experts compared the tech frenzy to that of the late ‘90s as the sector racked up 167 deals worth $50.2 billion globally, and capped off 2014 with the largest IPO ever in Alibaba. Private investors were hot on tech too, with software investments amounting to about 41 percent of venture capital investments in 2014 deals and Internet companies attracting an impressive $11.9 billion.

The markets painted a different picture this year, with a general slowdown in tech IPO activity as high profile candidates like Slack, Uber and AirBnB held off on launching public offerings. Yet, private investors who helped companies continue growing at a breakneck pace without launching IPOs won’t remain patient forever. Investors will soon be looking for a return on those investments, whether that return is delivered through M&A activity, or public stock offerings. As we head into the end of 2015, this realization appears to be growing, and chatter about a shift in sentiment among the VC and PE community is emerging. Some foresee a more conservative environment where private capital won’t come as cheaply in 2016.

Why is this important for tech communications people? The number of private tech companies flush with VC funding indicates greater deal activity on the horizon. Telling a compelling business story must become a priority before the IPO – or M&A deal – is truly underway. If you blink, you may miss the window of opportunity to weave a narrative that will position your company for success through the dealmaking process, and beyond.

Working toward an IPO When an IPO isn’t in the Works

Counseling a company through an IPO is a challenging endeavor – especially in an industry as competitive as technology. PR pros who haven’t been through the IPO process may be operating under the assumption that they can hold off on incorporating it into their planning until a deal appears more imminent. However, even if the CEO and investors don’t see an IPO in the immediate future, starting to think with the mindset of going public months or years in advance will pay handsomely when it’s time to tap the public markets.

The time before an IPO is an essential window to develop a compelling business story. Oftentimes, private tech companies do an amazing job of building a consumer following and attract great tech press coverage, but they may neglect the business and financial media – which becomes integral to success when an IPO is on the horizon. Failing to share your story with pure business outlets in advance of an IPO will almost certainly result in some degree of misperception once you file publicly. This is amplified by the SEC enforced pre-IPO quiet period, which severely limits the ability to combat misinterpretations of the business. Working hard to develop a quake-proof foundation before filing is an absolute imperative.

Even in a company with no concrete plans to go public, communicators must understand the necessary steps should the need arise. Here are some things to consider when building that solid foundation to support a successful future as a public company:

  • Get your messaging together. Crisp messaging that is aligned across audiences is imperative for avoiding confusion about the business. Private companies often have one set of messages for investors and another for their customer base. This can not only lead to brand identity issues, but also skepticism once the company is under scrutiny as an IPO prospect.
  • Build media relationships. IPO hopefuls tend to be focused on trendy tech websites with pithy headlines and Millennial readers. To be fair, these verticals are important for building credibility in the industry, but when vying for the eyes of investors, companies have to seek the attention of business and financial outlets. The Wall Street Journal and Bloomberg are read by thousands of investors on a daily basis, and are incredibly influential with this audience. It isn’t always easy to get the attention of these outlets, but with some effort it is possible to build relationships and even attract coverage as a private company, which can pay dividends (no pun intended) when it comes time to go public.
  • Get your house in order! This goes far beyond a communications person’s role, but everyone with a hand in an IPO-bound organization needs to be aligned in an effort to “professionalize” the company. Making an effort to put more formal processes in place at the same time a company is launching an IPO, is simply too late. Thinking ahead when it comes to formal accounting processes, the makeup of the management team, disclosure policies and a carefully articulated business plan all influence whether investors will buy your story.
  • Lay the Groundwork with the Street. Testing the waters with key Wall Street analysts as a late stage private company can provide valuable insight into the appetite for an offering among investors and provide insight into areas of the business management may need to consider addressing before taking such a step. Engaging with Wall Street is not something communications pros without significant investor relations expertise should pursue on their own, but with the proper guidance preliminary conversations with Wall Street stakeholders can be incredibly useful, even if an IPO is still a few years off.

Smart tech communicators shouldn’t let today’s environment lull them into false complacency. Private investors will eventually look for a payday and the tech world is brimming with game-changing companies that will eventually need to tap the capital markets to continue growing. When tech IPOs begin to flow again, companies that haven’t thought ahead and honed their stories will risk being drowned out by the ambient noise. Whether it happens in 2016 or beyond, the storytelling techniques best implemented for IPOs have universal application. Those with the foresight to operate as if they are on track toward an eventual IPO, regardless of management’s message, will be in a great position no matter what path the company takes.


 

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