- Louis Lehot, a Silicon Valley law-firm partner, specializes in taking companies from startup to IPO.
- Lehot gave his suggestions for how to prepare, like hires to make and risks to consider pre-IPO.
- This article is part of "Road to IPO," a series exploring the public-offering process from prelaunch to postlaunch.
The IPO market is expected to pick up later this year, so Business Insider emailed Silicon Valley lawyer Louis Lehot, a partner at Foley & Lardner, for advice on how startups should prepare for life as public companies.
Lehot has more than 25 years of experience advising businesses, financial sponsors, venture capitalists, investors, and investment banks on topics including equity offerings, mergers, acquisitions, and spinoffs. His work often involves helping startups prepare for initial public offerings.
The following has been edited for brevity.
What's the environment like for IPOs?
2023 was the toughest year for IPO activity in more than two decades. The IPO outlook for the second half of 2024, or at least the first half of 2025, can only get better.
Riskier assets, such as Bitcoin, have rebounded strongly, suggesting risk appetite is a lot higher. The Fed is expected to make at least one rate cut later this year. The after-market performance of some recent IPOs has been stronger. Earnings reports from public companies are improving.
There's a substantial backlog of companies preparing to go public as soon as the window opens, and the outcome of important federal and state election races should bring greater clarity.
Which sectors are most likely to be successful in an IPO?
- Healthcare and Biotech: These companies go public as part of their venture financing path, often before they have a product in the market. As a result, they are heavily risk-driven, and the opportunity to make alpha with smaller amounts of capital invested is real. If risk appetite is truly back, we can expect investors to pile into biotech, life sciences, and medical device IPOs. New tech, enabled by CRISPR and AI, should increase the speed and accuracy of clinical trials.
- Green Energy: As the effects of climate change spread, we expect industrial policy to favor renewable energy companies and the ecosystem that they enable, maybe even nuclear energy. Renewables and related technologies are gaining traction with a growing focus on sustainability.
- Enterprise software and fintech: There's a solid backlog of late-stage private companies whose venture capital and private equity investors require a public market exit to return capital to limited partners and raise new funds. As a result, we expect a bumper crop of enterprise software (B2B solutions, cloud services, and cybersecurity) and fintech companies (digital banking, payments, and financial services) to come to market when the window opens later this year or next.
Are public market investors generally keen to invest in IPOs, or are they focused elsewhere?
Public market investors are selective, focusing on established profitability and sustainable growth over speculative, high-growth stories. Many investors are diverting their attention to safer, more predictable assets due to market volatility and economic concerns.
What are IPO investors expecting in the current climate?
- Profitability, or a clear path to profitability: Unlike previous periods focused solely on growth, profitability is now critically correlated to a successful IPO.
- Sustainable revenue growth: Consistent and predictable growth trajectories
- Robust metrics: Strong KPIs and unit economics
- Valuation discipline: More conservative valuations compared to the frothy markets of past IPO booms
Should tech startups want to go public right now?
If you have a choice, you stay private.
For example, if you're the CEO of a successful startup with more than $100 million in revenue that's growing in excess of 30% at over 40% gross profit margins, every door is open to you.
There's ample private capital to finance your company's scaling needs. There is likely a robust secondary market for your personal shares if you need to take some chips off the table. You have no obligation to report your compensation and equity holdings publicly or your company's quarterly results, much less live under the public microscope and the constant glare of Wall Street analysts who are focused on reporting on any short-term event that might drive trading.
Fringe benefits include more control over business decisions, fewer regulatory requirements, and the ability to focus on long-term growth.
The choice is not even close. Any CEO-founder would want to stay private. Look no further than the example of the Collison brothers at Stripe.
However, the characteristics that drive a transformational CEO-founder to achieve this level of commercial success are not necessarily driven by the same logic.
The vision of a transformational CEO extends far beyond the perceived short-term benefits of a quick exit. I'm surrounded by mission-driven CEO's with the burning ambition to achieve global market ubiquity, which usually means an IPO is a necessary step on their long road.
What are the most important hires to make before an IPO?
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Chief Financial Officer: A CFO with public company experience is crucial for navigating financial reporting and investor relations.
The CFO of a public company is the first or second line of communication with Wall Street, key long-term investors, auditors of your financial statements, and financial regulators. In addition, the finance department will quickly need someone who can manage internal controls over financial reporting and write public financial reports. This person is usually a "controller."
The CFO will also need someone who can forecast, model, and plan ahead and ensure that the company, when going public and forever thereafter, accurately telegraphs its future performance on a forward-looking, one-quarter, and one-year-ahead basis. This is usually a vice president for forecasting, planning, and analysis, or FP&A. For larger public companies, a chief accounting officer is also on the road map.
- General Counsel: Whereas 20 years ago, a general counsel was not hired until just before an IPO, nowadays, a company with $10 million of revenue or more may consider hiring a head of legal in-house to control costs, particularly for rote, repeatable tasks. But an IPO puts the company under a microscope of regulatory, investor, employee, and public scrutiny where the stakes get large enough that an experienced general counsel is usually hired, and if large enough to support the cost, even a deputy general counsel for securities law compliance to manage the more hours intensive processes of making the company ready for IPO and maintaining compliance thereafter.
- Investor Relations Officer: About a year ahead of the big day, a forward-thinking CFO will try to hire a vice president of investor relations who has been through the process of managing a syndicate of analysts before, during, and after an IPO. Particularly for larger companies who garner analyst coverage from six or more sell-side and buy-side analysts, making sure the analysts are getting adequate information to build quality models will ensure higher quality coverage and greater liquidity for the company once public, which is a critical indicator of success.
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Audit Committee Chair: While a pre-IPO company will seek to hire a majority-independent board of directors, the audit committee chair is one key role to fill on the board.
The audit committee chair is usually a former CFO who has deep knowledge of the IPO process and the interplay of a board of directors and its independent registered public accounting firm, which is a critical relationship at every stage of an IPO and beyond.
The audit committee's role is to oversee the production and auditing of the financial statements and the financial integrity of the company's public disclosures and compliance with regulatory standards. The audit committee chair will want to make sure there are at least two other directors who can serve independently on the audit committee who are financially literate and expert enough to assist them.
What are the biggest changes startups must go through to be IPO-ready?
To consider a successful IPO, a tech company will need to have line of sight to $100 million in revenue with eight quarters of historical growth and line of sight to eight quarters in the future of predictable growth. For a tech business, annual growth in GAAP revenue will need to be in excess of 20% (and ideally double this amount) at gross margins of 40% or more. These are herculean feats that few businesses will ever achieve.
There also has to be some other ingredient, which some call the "sizzle," to inspire long-term fundamental investors to believe that growth can be significantly greater than what the models show over the next eight quarters.
Historically, that sizzle could be explained by exposure to international markets that would be enabled by the scaling capital provided by the IPO.
Today, revenue from a US tech business may well be evenly split between US and international markets from the outset, so the "sizzle" will need to come from planned advances in technology, new product releases, and new product enhancements that will unlock new and significant branches of growth.
What are the key process changes companies need to make ahead of an IPO?
- Leveling up the company's financial reporting function: Enhanced accuracy and transparency in financial statements is an absolute necessity, both historically and forward-looking for eight quarters in both directions.
- Corporate governance: Companies need to recruit an experienced, independent, and supportive board that can provide wisdom to management during the IPO process and beyond.
- Operational scalability: Ensuring systems and processes can support growth and compliance requirements. Have you installed a world-class ERP software system? Do you have a contract management system and CRM software? Do they all work together?
- Compliance and risk management: Implementing robust controls to meet regulatory standards is a playbook that a new CFO and new General Counsel can implement with the help of outside advisors.