So You’re Thinking of Going Public

public-to-private-company.pngIf you’re a CEO or a CFO, there’s a lot of differences in your day if you are running a public company versus a private company.  As most of the members at AceTech Ontario run private companies, there tends to be a lot of questions around what is involved in going public.  We decided to sit down with one of the few members of AceTech who are running a public company to find out what he has learned and what his advice is for fellow members.

Rob MacLean is CEO and co-founder of Points Loyalty and is a CEO member of AceTech Ontario.  His company did not exactly take the most typical path to becoming a public company due to circumstances and the hand they were dealt.  Points was incubated back around 2000 by a company called Exclamation Inc.  As such, they were a private company inside a public company.  Shortly after, as many people will remember the “bubble burst” and investments in private dotcom companies severely tightening up.  However, Points had gained substantial traction at this point so Rob and his co-founder, Christopher Barnard, combined Points with their parent company.  Thus they were now public and could more easily tap into that marketplace for capital, as well as utilize the funds that were remaining in the Public vehicle.

Other positives included an opportunity for transparency.  Points’ clients and partners are Fortune 1000 companies: big airline companies, hotels, etc.  Being a public company meant that Air Canada for example, could view their financial statements and know that they were a healthy company.  This gave them some inherent credibility, which was a great asset to them in the early days of business development.  Additionally, one of the ways they were able to attract talented employees early on was by being able to provide monetary value through liquid equity.  This is something that is very difficult to do for employees of a private company, and was particularly challenging for private  company’s post the  dotcom “bubble”.

Unfortunately, you can’t have positives without some negatives.  Rob discusses how, despite the fact that being public helped them recruit, the same positive was also a negative for them due to the size of the company.  “We’ve had periods over the years where we’ve grown the business 60% in one quarter in a year over year basis and the stock has gone down. You think ‘okay, that seems odd’”, explains Rob, “but  may have been more driven by a hedge fund closing shop , and so they have to sell their position and so you get into that classic supply and demand of stock”.  It can be very difficult on employees to see their stock move around as it does and have very little control over it.  Rob strongly believes that a company needs to get to a much larger, more stable stage before that volatility goes away.

Another big challenge Points faced was time and money.  “It really is quite a significant driver of work load from a CFO, CEO standpoint”, says Rob, “There’s certainly stages over the years I would have spent 40-60% of my time on public company type activity rather than in directly driving the business”.  Depending on the company, and its objectives, this isn’t necessarily time well spent for the CEO.  Rob would argue that they would have been better served if he was able to spend that time building the business instead.  There is no question that this takes away a signification amount of time from the CEO and Finance  roles within the company.  Additionally, it cost Points between one million and one and a half million dollars to operate as a Public Co.  Not every company can absorb this kind of cost, and the dollar amount has largely been the same regardless of the size of Points……meaning it was a significant burden in the early days when revenues and profits were smaller.

One point of concern Rob has for his fellow CEOs if they do decide to become a public company is focusing too much on the quarterly pressures.  There is a reputation that public companies are forced into quarter by quarter management style, and Rob admits that there’s some truth to that.  Since Points is considered, especially back in the early days, a very small public company, they made sure to still focus on the long term view of the business.  “It would be very easy to fall into the trap of not making the right business decisions because you were trying to meet a quarter,” says Rob, “I think generally speaking we’ve been able to avoid that, but there’s certainly a lot of pressure that people should watch out for. Having a strong , aligned Board, is critically important in avoiding the temptation of managing quarter to quarter.”

Another point for CEOs to pay attention to is the company’s growth trajectory.  Before going public, you want to make sure that your company’s growth is predictable as that is what the public market responds best to.  Rob explains that despite Points having continual growth every year, it was not a consistently increasing growth percentage which resulted in “chunky” (obviously a technical term) growth.  This made their trajectory difficult for the public market to understand. Analysts often seem to be more comfortable with a predictable 5%  trajectory  vs a growth profile that may be much higher , but less consistent.

There’s a belief that going public is the ultimate end game.  But all in all, if you are thinking about taking your company public, think about if it is the right time, and are you doing it for the right reasons.  “I think that there’s most certainly a place for being a public company, but you have to be very careful and very thoughtful regarding when is the right time” says Rob, “Access to capital is probably the most sustainable advantage in being public, but as with most good things, this benefit  comes with that are lots of challenges in terms of time, resources and cost.”

So at the end of the day, you have to ask yourself, are you going public for the right reasons?

 

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