What’s the operational playbook for SaaS companies waiting out the current slow market for IPOs? On Nov. 15, 2023, OPEXEngine CEO Lauren Kelley hosted a webinar with guest panelists Jonathan Neitzell and Eric Mersch on the topic of Pre-IPO SaaS: Using Benchmarks to Prepare.
Jonathan Neitzell is Founder and Managing Partner at Anduril Partners, a Fellow of the Alternative Data Council, FISD, former Chief Data Officer at Goldman Sachs Asset Management, and an investor and advisor to numerous companies. Eric Mersch is Partner at FLG Partners and author of Hacking SaaS: An Insider’s Guide to Managing Software Business Success.
Given the slow down since early 2022, the backlog of companies stacking up is greater than any other period in the last decade. A multitude of companies are in a holding period, and the webinar discussion focused on what companies can do right now to be in pole position when the market opens back up.
The conversation explored key considerations and best practices for a SaaS company to do now – the organizational positioning, reporting, and systems required for a successful reception from investors. An authentic, data-validated story is key when you’re communicating to the market. And benchmarking gives an organization the tools to accurately prepare to represent itself when engaging with external stakeholders.
- Stress-test KPIs: Test KPIs and their calculations against industry best standards and ensure alignment across the team. It’s important that everyone speaks with one voice. CFOs play a crucial role in teaching, aligning, and building a culture of transparent metrics.
- Embrace Benchmarks: Overcome hesitancy to leverage benchmarks early, even if the IPO is not imminent. Use them as a tool for internal assessment and improvement, fostering a data-driven approach throughout the organization, which stands up to external comparison. Benchmarking early also feeds into the collaboration with investment bankers to build their understanding of the business.
- OPEXEngine gives the CFO/CEO credibility: No one ever agrees on the SaaS metrics, so it is important to use an independent, industry database to set context.
Best Practices for Systems, Processes, and Reporting
Implementing best practices for systems, processes, and reporting is crucial for ensuring a path to an IPO and sustaining investor confidence. Offering clear guidance is critical to removing risk and thus improving valuations.
To get there, it is necessary to implement a three-statement model maintaining an up-to-date cash flow forecast. In addition, be sure to get an updated 409A 90 days prior to IPO date (this forces the company to adhere to option grants and to avoid backdating options).
A well-organized infrastructure is essential, encompassing a structured CRM system, an efficient Customer Success system, a comprehensive Legal Database, and a robust Accounting System with proper General Ledger. Additionally, a dedicated Tax System (SaaS is subject to tax) and a finance planning and forecasting system.
These systems must be firmly established before embarking on the IPO journey; attempting to implement them during the IPO preparation phase introduces unnecessary complexities. By focusing on key metrics like dollar-based net retention, ARR, and other key operating measures, organizations gain the capacity to provide meaningful forward guidance to prospective investors.
Benchmarking against current public companies, and using more detailed benchmarks from investors and industry databases like OPEXEngine help align the company to current KPI expectations in the market.
Preparing the Company
The transition from a private company to a publicly traded entity necessitates a significant cultural shift, particularly for Finance and FP&A teams. In the private sector, FP&A primarily reports to an executive management and board deeply engaged in the company’s narrative. However, the move to a publicly traded status requires a shift in reporting towards an external audience unfamiliar with the company’s story, emphasizing the need for meticulous and transparent reporting.
A lack of transparency often stems from weak systems, heightening the parameters of risk, and therefore strengthening internal systems becomes paramount to effectively navigate the complexities of the public markets. Ensuring a seamless transition involves aligning the narrative across the organization, with key executives conveying a consistent and validated story that resonates with external stakeholders. As the focus sharpens on key metrics defining success in the pre-IPO stage, a unified understanding of how each metric contributes to the overarching narrative becomes indispensable.
Organizational Alignment and Structure
The journey towards IPO-readiness should start about 18 months in advance, with a primary focus on evaluating the technology stack and establishing a unified understanding of metrics throughout the organization. This early preparation is instrumental in streamlining processes and ensuring a seamless transition to the public market.
An IPO-ready organization is inherently data-literate. To achieve this, strategic incorporation of roles such as data analysts and specialized hires in critical areas like Investor Relations (IR), RevOps teams, SEC reporting managers, and legal experts is imperative. These hires contribute to the development of a robust infrastructure capable of meeting the heightened demands associated with being a publicly traded company.
What Investors are Looking for When Evaluating Companies for IPO
When evaluating companies for an IPO, investors place a premium on a compelling and believable company story and positioning. It is essential that this narrative is not only validated by KPIs but is also forward-looking, providing a roadmap for future success. Investors are cautious of metrics that may be overstated and seek a transparent and accurate portrayal of a company’s performance.
Red flags are raised when there is a lack of granularity in explaining crucial aspects such as the go-to-market effort, market positioning, and competition. Claiming to have no competition may suggest a lack of understanding of the market or, worse, a lack of transparency and truthfulness.
Companies aspiring to go public must exhibit a comprehensive understanding of their sales cycle, demonstrate responsiveness to client feedback, and openly address potential challenges. A crucial element in winning investor confidence lies in the clear articulation of capital use, elucidating how the funds raised will drive growth and market leadership, whether as the first of multiple raises or enabling strategic moves.
Investors also emphasize the importance of a well-populated Virtual Data Room (VDR), recognizing it as a critical source of frustration in the IPO process. A comprehensive and organized VDR not only streamlines the due diligence process but also contributes to the overall efficiency and success of the IPO journey.
Today’s current market conditions present an opportunity for companies to strengthen their fundamentals, build out meaningful metrics, and use benchmarks to improve the validity of their pitch for a possible upcoming IPO window. If the IPO window doesn’t open up, the same preparations are just as valuable to prepare for M&A – or provide the foundation for success in the next stage of growth.