Advice for Startups Dreaming Pre-IPO


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By Karen E. Klein   |    Bloomberg BusinessWeek    |   October 22, 2013, 9:29 PM EDT
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Bloomberg LogoQuestion: What can CEOs who contemplate going public in the future do during the startup phase to prepare for an eventual IPO?

Answer: An IPO may be “the closest business geeks get to winning the Super Bowl,” says Jeff Tangney. The medical app startup he co-founded from his Stanford University dorm room in 1999, Epocrates, went public in 2010.

Tangney, who is now the chief executive officer of Doximity, a company he describes as a “LinkedIn for physicians,” has some advice for entrepreneurs hoping to strike it rich through an IPO: The “bankers and lawyers are the only ones who get rich on the day your company goes public.” In 2012, Epocrates was acquired by another public company, Athenahealth, for about half of what it was valued at immediately post-IPO, he says.

In other words, IPOs are not for everyone. In fact, “being a public company is only right for a tiny fraction of companies,” says Adam Epstein, founder of Third Creek Advisors, a San Francisco company that advises the boards of pre-IPO and small-cap companies. He wrote a commentary for in March about some of the problems with the small-cap market.

“Our country has this interesting romance with IPOs that is quite similar to the romance we’ve had with homeownership,” Epstein says. “They’re not the right thing or even a good thing in a vacuum—or something everyone should aspire to.”

With that caveat, there are steps that fast-growth companies can take in their early days that will smooth the way for an exit, whether that is an acquisition or an IPO. Here’s some advice to keep in mind, from accounting to governance to marketing.

Keep it simple. Is what your company does or produces easy for investors to understand? If what you’re doing is mind-bogglingly complex, investors will tune out early. “The smaller the company, the easier it needs to be to understand,” Epstein says.

Boards of directors. Recruit independent directors with an eye toward the requirements of a public company, says Jason Day, a partner in the law firm Perkins Coie. “Getting a former CFO or Big Four auditor on your board early is helpful for audit purposes. It also helps when marketing your IPO to have some diversity in industry expertise, race, and gender on your board.” Epstein recommends recruiting an expert on capital markets and corporate finance for your board. “Pre-IPO companies that don’t add these skill sets to their boards will find it tough to master the increasingly austere challenges they will face in a small-cap market,” he says.

Corporate governance. Get into the habit of holding board meetings and keeping minutes early on. “A lot of startups don’t take corporate formalities seriously because they think they don’t have to,” Day says. “But if you’re thinking about bringing in outside investors or going public, it will be very relevant to do so.”

Get organized. Your financial records will be put under a microscope in the due-diligence process. “Underwriters will look at every legal and financial document you have, and everything you say must be backed up by documentation,” Day says. “You’re not wasting effort by organizing your data from the beginning rather than having to go back and re-create it later, when it will be much more time-consuming and expensive to do.”

Predict the future. Try to get really good at forecasting your company’s future performance. “The smaller you are post-IPO, the more accurate you need to be. If you over-promise and under-deliver, that’s something you can never recover from,” Epstein says.

Stay customer-focused. “Turn up the volume on your customers, because that’s where your best ideas come from,” Tangney says. “You’ll be spending a lot of time with bankers and smart people from Wall Street who will distract you with strategy and ideas. Don’t let them keep you from being the company your customers want.” Stay in touch with core customers and treat them like partners, says Thomas Kellerman, a managing partner in the Palo Alto office of law firm Morgan Lewis. “Underwriters always want to talk to customers, so think about how happy customers can help you out.”

Legal structure. Companies that do IPOs are typically formed as Delaware C corporations. The process can cost as much as $10,000—a lot of money for a startup. But “making that outlay can save a lot down the road if you plan to make your company more than a lifestyle business,” Tangney says. Having gone through one IPO, he formed his current company in this manner right off the bat.

Focus on finance. The accounting and finance teams are often the last of the C-suite to get filled out at a startup. But that’s a mistake for a company that wants to eventually go public, says Eric Newsom, co-chairman of the corporate and finance group at Manatt, Phelps & Phillips in San Francisco. “You’re not going to have fully audited financial statements” in the beginning, he says, but “you want to have [financial reports] that look presentable and can easily be wrapped into the finance, auditing, and accounting processes that you’ll eventually be required to do.”

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A globally recognized small-cap expert, Mr. Epstein has advised, governed, and invested in hundreds of small-cap companies. His capital markets and corporate governance acumen are products of a singular perspective – a former corporate attorney, operating executive, institutional investor, and, now, board advisor. As Bloomberg Businessweek commented regarding Mr. Epstein’s category-defining corporate governance book, “attention, directors of small-cap companies. Help is on the way.” 

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