The human factor in an IPO

By in Opinion

The CFO is the champion when it comes to preparing an IPO – driving the financials, systems and processes to ensure compliance with ASXs stringent regime and an IPO success – however, when ascertaining whether an entity is ready, commonly overlooked is the human factor.

This was the resounding message at Sydney’s inaugural IPO Network event held last month at the BoardRoom, with special guest speaker Lisa Schutz, founder and CEO of RegTech Verifier.

The topic of discussion – Do start-ups list too early?

By way of background, in 2016, the ASX introduced a vetting regime in response to concerns that too many early-stage tech companies were listing prematurely. Since then, the ASX have rejected over 80 listing applications where it believes business, governance or regulatory standards expected of a listing company aren’t up to scratch.

However, in 2018-2019, there’s been a multitude of failures, which begs the question – if the human side was managed more effectively, would we see more successes?

Lisa Schutz seems to think so.

Opening the forum at the IPO Network, Lisa discussed her experiences as a RegTech start-up who is now in the process of scaling up.

For Lisa, her journey toward IPO was, after intense consideration that took her across the globe, a decision not to list.

Lisa pointed out during her research, that for every founder who thought listing was a great idea, there were plenty of others with stories of drama and difficulty.

Acknowledging the passion, human creativity and resources of start-ups, Lisa said the biggest cost from an IPO listing too early was wasted human and financial capital.

“For everyone’s sake, we need to make sure human and financial capital is not wasted by listing too early,” said Lisa.

Lisa urged professionals leading IPO’s, that if they do one thing differently when taking a CEO/founder to IPO, is to tackle the career path for the founder explicitly – including getting them an executive coach.

“An IPO needs to be managed sensitively, it’s important to reflect on how the people side gets managed. The elephant in the room for IPOs is the need to discuss how the CEO/founder would be helped to either step away – or be prepared for the public journey” says Lisa.

Is an IPO really the ultimate goal?

For a start-up, the vision to IPO may be their ultimate goal – a ‘successful’ IPO allows the company to attract the talent and capital they want. However, sometimes the reality is that the reasons driving the IPO mean it’s not the right choice.

So, what does a bad IPO look like?

“Bad news amplified across the media; cost and admin slowing the entity down; founders who are ill-equipped to run the public company; and pressure from early stage investors to have a liquidity event – all leading to an ‘unhappy family dynamic” explained Lisa.

In all of this, Lisa said founders need to ask – who are your investors? Would you list on the ASX? Or, are there other markets who understand your business model or industry segment?

Drawing on her own experiences, Lisa said her biggest learning in deciding not to list was to ask herself – does what we have to say resonate with the retail market?

“When it comes to investment they either get you – or they don’t.”

Putting this in context, Lisa explained that particularly in Australia, trying to get retail investors to understand what they did, was harder as opposed to other global markets where the Regtech industry was more developed.

Lisa said a non-negotiable in her mind was that start-ups must be in scaleup mode before they even consider an IPO and they should also be looking at the alternatives to listing – saying sometimes these lead to non-dilutive approaches,

Lisa was also joined by Mark Calvetti, Director, Corporate Advisory and moderator Jeffrey Luckins, Director, Audit & Assurance in a panel discussion.

When asked the question – do startups list too early? Mark said the real question should be – Are you a good CEO for a listed company? Or, maybe you can do it if you have the right support.

“You need good people around you – including a good CFO” said Mark.

“CEOs are invested in their business and can articulate the vision, but a good CFO can keep the owner grounded by being a sounding board. It is through building a trustful relationship the CFO can help focus the growth.”

He also agreed with Lisa in questioning the IPO’s relevance for a startup, saying you need to think about the reasons for listing – strong finance people will counterweigh and provide support to the founder and help through this process, by first asking – What do you want to do? And, when do you want to exit?”

“These questions, along with a great CFO and good people around you will help determine the direction, says Mark.

“While founders may be great at building up businesses, they may not necessarily want to be hamstrung by a level of governance and compliance that comes with a listed company. This means they need to bring someone in to take over or put good people around them who can provide the right support to the business.

A CFO is a counsellor, financer, advisor, strategist – they play a multitude of roles and their relationship with the founder is important.”

Mark said it’s also important to consider other options, stating that many times, the reasons are short-term and this thinking worries him.

“For example, are they making the right choice in taking a lump sum, or is there more upside that can be extracted from the business to continue growth?”

“There’s no shortage of capital in the market, but just because you can’t find investment in Australia, doesn’t mean you won’t find the appetite elsewhere” said Mark.

In closing the discussion, Jeffrey Luckins touched on critical factors for a start-up, including timing and the brilliance of diversity.

Lisa agreed, reflecting on her own diverse Board and the statistics behind the success of women in start-ups.

“The irony is that there is a massive arbitrage opportunity for investors and those hunting for talent due to corporate Australia’s challenges with diversity. So, you better get in quick and take advantage of the great talent available, before the rest of corporate Australia catches on to the beauty of diversity!” said Lisa.

The panels final takeaway? More care is needed in nurturing the CEO/founder to step away – or prepare them for their listing journey.

William Buck is a proud founding member of the IPO Network; a diverse and complimentary group of professional services advisors assisting businesses to prepare and execute their exit strategy and to support listed companies beyond their IPO.

If you would like advice on whether an IPO is right for you, contact a William Buck advisor today.

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