IPO-Readiness With the Former CFO of VMware
Going public is an enormous undertaking full of unknowns along the way. Among many questions, top of mind for high growth late-stage companies include ensuring the proper financial systems, controls, and people are in place. What is your system footprint? Do you have predictable and repeatable financial reporting processes and controls? Do you have expertise in your team to support the IPO process?
I sat down with Jonathan Chadwick, Former CFO of VMware and Skype, and current Board Member/Audit Committee Chair at Zoom, ServiceNow and Elastic, to discuss what teams getting ready to go public must have in place to ensure a successful and smooth initial public offering.
Here’s a transcript of the highlights from the conversation.
How do you know when you are ready to IPO?
As a board member, the question I like to ask is actually not am I ready? But, why am I going public first of all? I bring that up because 99% of the time your board members are aligned with the management team (especially for early stage companies) about going public, but governance plays a role. Sometimes there can be tension that builds up between when some people think you should go public versus when you’re actually ready.
Why are we going public? Is it because we need capital? (Which is a very valid reason.) Is it because it really helps our enterprise brand to be a public company? Once I’ve answered those questions, then, I get to, am I ready?
What are key signs that you’re ready to go public?
At a high level, I think there’s 3 different buckets.
The first is this expression we’ve all heard: product market fit. Is my go-to-market team engine all working? Is it starting to address questions of scale? Or do I still have fundamental problems with the product itself?
Especially as a board member, I’m asking myself, “How does the go-to-market team feel? How does the product feel? What’s the feel about the readiness of being a public company?” Generally speaking, as a public company, there are a lot less places to hide. So, product market fit is number one thing.
The second thing is the team. That starts with the CEO and the Board, but the team underneath them is where all the value and all the work gets done. Is the executive team in place? Are the finance and operations teams in place?
Then, operationally, is the company ready? And that can be everything from “Can I close the books on time?” to “Can I analyze my business forecasts?” to “Do I have rigor in that? Do we have compliance in a good place?”
For companies thinking about going public, what should they start working on today to ensure IPO readiness?
Well, there are so many things. We should take a step back and ask: What are the core elements of being a public company?
The ability to close your books on time with accuracy and quality without killing your people is kind of, like, #1. We don’t get to talk about strategy unless we can make sure the double entry all works in a repeatable way.
FP&A. Making sure you decide what are the KPIs you’re going to measure the business on externally and internally. Then you can derive and manage these metrics to create accurate forecasts.
Make sure that you’ve got the right people doing that. It’s one thing to measure business. It’s another thing to actually influence the business.
Controls. Private companies don’t need to be SOX compliant, but they do need to be controls compliant. The way I think about it, fraud exists whether you’re a public company or not. It’s really important to think about how you manage the potential for fraud and then, from there, you can grow up to be fully SOX compliant.
Really focus on systems, process, and data because these will be the things where you can do many things in spreadsheets. But when the spreadsheets start to get about 20,000 lines, you generally have a scalability problem. It’s usually a pretty good tell to start thinking about single sources of truth.
Who are the key people you need to hire to ensure the IPO process goes smoothly?
I think it’s important that you really think about compliance people. I spend a lot of time upfront talking to the compliance leaders like the General Council.
Make sure you’ve already thought about getting somebody in place who’s strong enough to lead your SOX program. I think it is really important and I don’t necessarily think it needs to be your Internal Audit person.
Actually, what I’ve seen in many cases is people hire somebody to run Internal Audit who may be qualified to be an Internal Audit Leader, but 80% or more of what they get asked to do in the first X quarters is around SOX. That may or may not be the best use of their time.
It could be the case that you hire a senior program leader and decide to work with somebody who really gets SOX up and running. You don’t have to be SOX compliant on the first 10K, but you certainly need to be on the second.
What do you think are the biggest differences between private and public companies?
The largest gaps that I see between larger companies and earlier stage companies are their systems and people.
I see this show up from a systems side with large complex spreadsheets. I’m the first person to say that I think spreadsheets still have a purpose in life. We’re not doing away with them anytime soon. The flexibility that spreadsheets provide in delivering an answer quickly is a super compelling reason.
But there comes a time when nobody else can understand your mission critical spreadsheet. When you start asking your questions like “Okay, how are we doing revenue again?” and you find it’s literally a 20,000 line spreadsheet which is being used to handle ASC 606.
Then, you ask the next question, “And who’s responsible for maintaining that spreadsheet?” And it’s… “Joe”. And Joe is taking a trip to Tibet, like an annual sabbatical (I’m exaggerating to make the point). But, you know, you’ve got multiple single points of failure there.
What are some best practices that you have seen to make sure the IPO process goes smoothly?
Yeah, I think the number one thing at the start is getting alignment with the Executive team and the Board.
You need to ask: Is this process we want to kick off? Because it’s non-trivial and it takes resources. It’s not just making sure the financials are produced faster; it’s a more comprehensive issue than that.
When I’ve seen the most successful companies gear up around this, they’ve had a conversation at the Board level and they’ve had a conversation with the management team, usually the founding CEO(s).
Yes, we really want to be doing this and we’re going to make it one of our top X, top 5, top 10 priorities for the business because it will take some other resources. We’re going to put systems in place. We’re gonna put a greater investment in our legal, finance, and compliance functions.
By definition, if you put resources in that area then you’re taking away from somewhere else like the product — which founding CEOs care a lot about. This is why it’s important to get out of alignment to start off with.