DEAR chief executive. First, congratulations. You have decided to float your firm’s shares on the stockmarket. After years of toil behind the scenes, it’s time for the big stage. You probably feel pretty good right now, especially after those insightful bankers from Goldman Sachs said that your firm is one of the most impressive that they have ever seen in their careers and that they are generously going to give you a discount on their normal fee and charge you only 4% of the IPO proceeds. Unfortunately, though, things will now get much worse before they get better. An IPO is like having children: months of waiting, an agonising delivery and afterwards your world is never the same again.
At least you are not alone. American IPO volumes are at their highest level for three years. In New York Dropbox and Spotify recently listed. Even Michael Dell, who took his computer firm private in 2013 and grumbles about the myopia of stockmarkets, is taking his firm public again, through a merger. In China a slew of tech stars are expected to float after Xiaomi pulled it off this week, including an online-services platform, Meituan Dianping. All told, $200bn could be raised globally this year. More whoppers, among them the likes of Uber, Saudi Aramco and Ant Financial, Alibaba’s financial affiliate, could take the plunge next year.
Your immediate nightmare is the flotation process, which is a cross between an election campaign, a show trial and an Ironman event. You have six months to put in place a suitable board of directors, nail down your strategy, and prepare the legal and financial documents. After that you have to sell the story. Expect to visit up to 100 fund managers in a few weeks. Train yourself to say the same thing ten times a day and to look profoundly interested as 30-something MBAs pick apart your life’s work.
Unless there is a stockmarket crash this year, you will almost certainly succeed at listing your firm, although the valuation may be less than you hoped for—Xiaomi was floated at $54bn, not the $100bn it wanted. Nonetheless, the real shock will take place after you have gone public.
Time will vanish: block out a quarter of your diary for financial-results days, speeches at investor conferences and meetings with portfolio managers, “buyside” analysts at asset-management firms and “sellside” analysts at investment banks. These encounters will seem outrageously asymmetric. You have to be consistent and calm. Lawyers will vet what you say to ensure you do not break laws on disclosing sensitive information. It is a serious breach of etiquette for you to comment on the level of your own share price or to criticise the financiers. When Elon Musk, the boss of Tesla, called analysts boring boneheads on a conference call in May, investors saw it as a lack of self-control.
The investors, on the other hand, can do what they like. They talk rubbish sometimes and switch jobs constantly. They don’t have to reveal their agenda (are they long or short your shares?) and try to tease out gossip with which to speculate. If they own your stock they may sell at any time, in mercenary fashion. They justify all this by piously invoking “shareholder rights”.
Even with thoughtful shareholders, you will have to articulate yourself in a new way. You are used to being visionary, passionate and profane. Your new financial friends will be abstract, obsessed with numbers and keen on comparing you with your competitors. Karl Popper, the philosopher, said that scientific knowledge progressed through the falsification of hypotheses. Often it will feel like you are advancing hypotheses about your firm’s opportunities, and they are just shooting them down.
You will have a new, intimate relationship in your life—with your share price. Contrary to the cliché, you will not be a slave to its short-term gyrations. Financial markets are much more sophisticated than that. But nor can you just run the firm and “let the share price take care of itself”. Lots of staff will own shares or have stock options; they will follow it closely. Your non-executive directors will use it as a rough gauge of how you are performing.
The share price will subconsciously alter the way you think. You are used to taking strategic decisions, to which your team then commits. Jeff Bezos, the boss of Amazon, puts it best: those who dissent should “disagree, then commit”. But the share price makes dynamic judgments about the long term that will cause you to doubt yourself like never before. Think of Evan Spiegel, the boss of Snap, who redesigned how the social-media platform worked this year only to see the share price fall by 16% in a single day in May. You have to have a thick skin.
Finally, your authority will be weakened. Your old buddies—the ones with weird hair but brilliant ideas and total loyalty, will have to be hidden in the basement. Slick subordinates who establish a rapport with investors may start acting like your equals. Activist shareholders can pounce, spitting libellous criticisms and demanding that all the cash that you have stashed away for a rainy day should be blown on a share buy-back. Later you might face a hostile takeover, which will feel like a violent coup d’état.
Yours is the Earth and everything in it
One way to protect yourself is to keep voting control. But even then it pays to do more. Find trusted subordinates who can speak to the markets on your behalf. Attract blue-chip funds, such as Baillie Gifford in Scotland or GIC in Singapore, to act as anchor investors. Think deeply about your plan and stick to it. In time you will see the advantages of being listed. You can use shares to buy rivals or raise more capital. You can more easily tap the vast information machine of financial markets to gather intelligence. You will learn to judge when your critics have a point. Processes, governance, discipline and consistency are things that firms have to master if they are to grow up. With luck your private kingdom will evolve into an institution, with its own identity. So when you ring the bell at the stock exchange, remember to smile—and that what doesn’t kill you makes you stronger.