The slowdown in IPO business at the end of 2000 can be compared to the sudden shutdown of a high school party when the cops show up. The torrid pace of 1999’s IPO activity, with its flurry of young businesses coming to market quickly, was probably more like a high-energy rave party than a suburban Friday night gathering. And yet what happened in its aftermath has the same effect: the party was busted. By the end of 2000, the IPO market had all but dried up, leaving a lot of eager young companies to pine over what could have been. And for IROs, the issue became one of communications: how do pre-IPO companies position themselves in a post-party IPO market?
According to IPO.com, 1999 saw 555 offerings completed in the US against 440 in 2000. Much of 1999’s IPO activity was driven by internet start-ups who rode the rocket wave of bull market success until… well, until the tech wreck of March 2000.
The bubble burst, and what had been a hot IPO market for some of the biggest names in investment banking suddenly cooled off to a deep freeze. ‘In the first quarter of 1999, people were still looking for potential top-line growth whereas now they are much more concerned about bottom-line growth,’ notes Brad Sinrod, president of IPO.com. ‘Timing is really everything.’
Timing, indeed. ‘The IPO plunge meant everyone had to go back home and build solid business plans,’ says Marina Echavarria, managing partner of Double E Communications, a PR and IR firm that works mostly with pre-IPO companies. ‘When the market was doing well, investment banks were lining up to take companies public and now they’re asking companies to wait because there is a lack of confidence in the market.’ For pre-IPO companies looking to enter the market, their initiation into the world of capital markets involves an understanding of the often devastating effect of market swings. In other words, if patience is a virtue there are a great many virtuous private enterprises waiting in the wings.
Pre-IPO IR
Out of the bull market’s IPO frenzy came a new trend in investor relations. ‘In the last two years a phenomenon has developed whereby IROs are being called in to work with companies twelve to 18 months in advance of their IPO,’ elucidates Rick Anderson, senior vice president of Thomson Financial/Carson’s global consulting practice. ‘A lot of times venture capital firms or investment bankers are advising companies to bring in investor relations professionals at a very early stage.’
This approach may sound a little far-fetched to IR veterans who remember the days before the IPO maelstrom of 1999, when investment bankers very rarely gave much forethought to investor relations. ‘It used to be that a top investment banker, who shall remain nameless, would mention IR on the last day before pricing,’ recounts Anderson. ‘Now one of the first questions private companies ask themselves is, Do we need to hire someone for investor relations and At what level?’
So what happens when an IR phenomenon is born at the tail end of a bull market? Can it mature into a full-blown practice at a time when the last dregs of the IPO party are quickly evaporating in the dry markets? The answer, of course, is yes.
‘The one thing that changes in a bear market is that you need to work extra hard to distinguish yourself from a lot of look-alike companies in the same space,’ suggests David AR Allan, senior vice president of investor relations at PR and marketing agency Ketchum. ‘The business model is under more scrutiny and it’s no longer enough to say you will make money at some point in the future. You have to have a clear and believable path as to how you are going to get there.’
Since companies are having to work harder during the days leading up to their IPO, some are recognizing the real value of hiring IR professionals at earlier stages. ‘When a company would approach us two years ago, their IPO was usually around the corner; now it’s a much more long-term strategic process,’ notes Michael Kempner, president and CEO of The MWW Group.
A good level of visibility does, however, have to be tempered with a solid understanding of the SEC’s rules for communicating during the quiet period.California-based Webvan learned this lesson the hard way when the SEC pulled the company’s IPO two weeks before pricing in the fall of 1999. The incident struck fear in the hearts of many young companies and brought the issue of quiet period chatter (or non-chatter) to the forefront of investor relations.
Paying the price
‘There were a couple of things that happened,’ explains Bud Grebey, vice president of corporate affairs at the now-public Webvan. ‘We were on our roadshow with the underwriters, and we had a conference call that was only open to analysts. There was information given that was interpreted as going beyond what was disclosed in our prospectus,’ he says. Unbeknown to Webvan’s management team, a reporter from TheStreet.com, Adam Lashinsky, was participating in the call and wrote about it. Around the same time period, recounts Grebey, George Shaheen, Webvan’s CEO, ‘was contacted by a reporter who wanted to speak to him about his decision to leave Andersen Consulting, and in what was wrongly or rightly perceived to be an off-the-record conversation, Shaheen made a comment about the growth of Webvan which was then published’.
It was those two incidents that registered on the SEC’s radar screen. Then SEC chairman Arthur Levitt ‘was looking for a company to make an example of, and certainly Webvan was a very high profile pre-IPO company,’ says Grebey. Following the SEC’s reprimand, Webvan amended its prospectus and entered a three-week cooling off period before launching the IPO on November 5, 1999. ‘The irony is that during that cooling off time, we probably gathered more attention, enthusiasm and media interest for the pending IPO than before the SEC action,’ Grebey points out. ‘We had an extremely successful IPO, raising $405 mn, which was the second largest IPO of the year.’
Laying the groundwork
At the time of the SEC’s action, Webvan did not have an investor relations team and was following the advice of its underwriters. In retrospect, Grebey says, the company should have hired an IRO earlier on in the process. ‘It makes sense to have an IR professional on board through the roadshow process both to ensure a consistency of message and to build a relationship with the CEO, CFO and chief legal counsel,’ he says. ‘Also, depending on how the organization is structured, the IR position should be closely connected to the media relations function.’
Hiring an IRO prior to the quiet period can help avoid hiccups like the Webvan incident as well as put in place internal structures that are crucial to the company’s survival as a public entity. MWW Group’s Kempner says that in a perfect world, private companies will hire an IR consultant or in-house professional 18 months prior to their public offering, before they hire an investment banker. ‘The more a company communicates before it has hired an investment banker and filed the registration statement, the more it can communicate during the quiet period.’ Kempner believes establishing a frequent pattern of communications with the media and the Street well in advance allows a company to continue sending out news later on.
‘We recommend that companies establish a pattern of communications on material events – that could be sales figures, acquisitions or major new hires – so they can continue that communication during the quiet period,’ adds Ketchum’s Allan.
The bottom line with the quiet period regulations is to avoid talking about anything that is not in a company prospectus. ‘We advise companies to funnel all communications through one or two people, usually the CFO and IRO, and make sure that every public statement and press release is cleared from the moment the underwriters are chosen until 25 days after the IPO,’ says Karen Dempsey, a securities lawyer with Wilson Sonsini Goodrich & Rosati. ‘All investor relations functions have to be verified with the company’s prospectus. As long as the current version of the prospectus talks about a product, it’s okay to talk about it in a press release. And if it’s really early in the game and the company is not yet marketing on the roadshow, issue a release and then in the next amendment with the SEC, disclose the change.’
First impressions
‘The way your choose your investors really defines your pre-IPO strategy,’ says Dave Holtzman, CEO of Opion, a pre-IPO company in the early stage of financing. Holtzman has been heading investor relations for the company since last June when he left his position as CEO of Network Solutions to tout his and partner Nick Arnett’s business plan for Opion to angel investors. ‘With Opion, we knew we were going into a very touchy fund-raising market and were going to need all the help we could get. So we were very selective in how we approached investment money. We chose people who could provide more than just capital,’ he recalls.
Holtzman says Opion filled its entire senior management roster with recommendations from investors. Currently, Opion has raised $7.2 mn in its first round of financing – half from angel investors and half from venture capital firm New Enterprise Associates. The company is preparing for a second financing campaign this summer.
‘Pre-IPO investor relations begins the day the idea pops in to your head to go public,’ Holtzman proclaims. ‘The moment you start fund-raising, you are setting an expectation of how you will continue to communicate with your investors throughout the lifetime of the company.’
Holtzman has already had the experience of heading IR in a public company, as CEO of Network Solutions. He headed a successful IPO, two secondary offerings and an acquisition. He says the intangible aspects of pre-IPO investor relations weigh into the decision-making process for investment bankers and venture capital firms. ‘Beyond the business model, the financials and the imperial measurements, there are some pretty subjective measurements investors use to size up the management team: their integrity and their ability to communicate, both of which start from day one.’
Standing out
Today’s IPO market could be described as choppy at best. Early February saw the withdrawal of several planned technology-related IPOs, including Petopia.com, the San Francisco pet supplies retailer which halted plans for a $100 mn initial public offering. However, during the same period, the biggest IPO of the year came to market. KPMG Consulting temporarily bolstered the IPO market with its $2.5 bn offering on the Nasdaq exchange. While the offering was smaller than the company had originally expected, it raised some hopes, nonetheless.
The near-term quietness of the IPO market should not dissuade private companies from setting up internal IR programs in anticipation of going public. For skilled investor relations professionals, the drying-up of IPO capital is always relative. ‘One thing to remember is there is still a tremendous amount of capital out there in the venture capital and investment funds,’ encourages MWW Group’s Kempner. ‘There is still a lot of money that wants to be spent; it’s just a matter of getting the jitters out of the system.’
In other words, strong companies will not be turned away if they take the right route. ‘There is a lot more skepticism now,’ Kempner says. ‘But it’s very important that you prove your business model as a viable strategy in order to get financed.’
Double E’s Echavarria agrees this is a time for solid stories and strong business strategies. ‘The companies going public nowadays are the ones, as always, with strong management teams, good products, solid revenues and profits, and who are staying on top of current trends,’ she says.
‘What you do in a slowdown is the same as what you do in a good market, which is get out there and take advantage of opportunities to be seen and establish a pattern of material communications which is distinguished,’ says Ketchum’s Allan. As more companies continue to see the benefits of tapping into the capital markets, undoubtedly they will recognize the integral role IROs play in preparing that process. For investor relations officers, this is a whole new world of challenges; a world where skills and knowledge can mean the difference between success and failure.
Creating the buzz
Preparing a disclosure policy, tightening the company’s story, training management and preparing the roadshow presentation are just some of the responsibilities that fall under pre-IPO investor relations. The IRO’s main task, however, is to achieve a high level of visibility for the company. ‘We encourage private companies to take advantage of opportunities to get out and meet analysts and investments banks,’ says Ketchum’s senior vice president of investor relations, David AR Allan. ‘In order to create excitement about your company you have to be communicating directly with the media, 18 months out,’ adds Kempner.
