Ahead of Listing, CFOs Should Prioritize the Investment Narrative

Over the past two years, a record 792 companies have entered the public markets. More than 75% of these new listings were through traditional IPOs and direct listings, while the rest were completed through special purpose acquisition company (SPAC) transactions—with 124 definitive agreements currently in progress and hundreds of SPAC sponsors still searching for merger targets.

However, for these newly public companies and their shareholders, maintaining positive momentum may prove far more challenging than expected.

This is not a prediction about market trends, but rather an assessment of readiness to navigate the challenges of the public markets. As investor relations advisors serving a broad range of companies—from mid-stage venture-backed firms to mature large caps—we have keen insight into what it takes to succeed publicly. In the current high-sentiment environment, a misstep could result in a severe fall.

Before emphasizing risks, what exactly do we mean by "readiness"? This is a key question because for companies about to go public and the many advisors in their IPO ecosystem, preparation typically means functional readiness—from establishing accounting and financial reporting systems, to determining equity incentive plans, to refining board structure and purchasing D&O insurance, among many other matters. These are undoubtedly important prerequisites, but none of them touches the core of what it takes for a company to succeed in the public markets.

That core lies in the daily dialogue between the company and the investment community—the investment narrative and how it is managed through good times, bad times, and everything in between. This foundational work determines management's credibility with sophisticated investors and ultimately influences company valuation. Newly public companies operate under a real-time spotlight, and skeptics often work behind the scenes. Every word a CEO says is scrutinized, easily misunderstood, and even distorted. Experienced companies and executives manage expectations with exceptional care, placing disciplined financial communication on equal footing with good public relations.

In today's frenzied IPO market, the risk is that companies lack the time and energy to build a solid investor communications foundation. Several key factors are at play:

• Rushed team assembly. Valuation levels are remarkable, attracting companies that previously thought an IPO was still one to two years away. We see many companies planning to announce public market transactions within weeks while still hastily recruiting for key financial positions. One company went public with a first-time CFO and no FP&A leader, with pricing occurring just weeks before its first earnings call. Another well-known company that went public via SPAC this year hired its CFO on the very day it announced the transaction. There used to be a rule of thumb: companies preparing to go public should identify their CFO at least 12 months in advance. That convention no longer applies.
• Diluted advisory input. Even when these companies attract prominent advisors for their transactions, the advisory ecosystem is overwhelmed, with many deals led by junior teams lacking critical senior insight who tend to say "yes" to the CEO rather than helping them prepare for public market life. The risk is that many companies enter the public markets with poorly constructed guidance, insufficiently vetted KPIs, and inadequate preparation for the first earnings call that arrives within weeks of the listing event.
• Mismatched time horizons. Success in the public markets has always meant managing Wall Street's short-term expectations while creating long-term value. But for many recent new listings, the gap between short and long term is a chasm. Take electrification alone: since January 2020, dozens of companies have gone public via IPO or SPAC transactions. Many of these companies do not expect to generate positive cash flow for several years and will likely need to raise additional capital before then. Some will be hugely successful, others will be outcompeted or consolidated—this is the natural course of industry evolution—but likely too many will stumble in the public markets due to poor communications management. The quarterly earnings culture of "beat and raise" favored by sell-side, short-term funds, and retail investors further exacerbates this challenge.

IPO advisors and CEO friends who have been through the process will share their pearls of wisdom—"under-promise and over-deliver," "make sure you don't miss market expectations for the first 10 quarters," and so on. But don't expect the team around you at IPO to fix any missteps, as most advisors have already moved on to the next deal. A company we recently engaged with stumbled in its first two quarters, and the prominent bank that advised on its SPAC transaction had effectively abandoned it.

Ultimately, the responsibility for preparation rests with the company itself. This requires rigorous preparation with sharp focus from management, led by a strong investor relations team with public market experience. Of course, many in the IPO community understand this, which is why IR executive compensation has soared. But in the current market, IR talent with hands-on experience is in short supply, greatly increasing the probability of missteps among companies about to ring the bell in the coming weeks and months.

As 2021 draws to a close, markets have already shown volatility, with increasing talk of an inevitable correction driven by pandemic-related disruptions, geopolitical and regulatory risks, inflation, and ultimately Federal Reserve policy direction. But what is not being discussed is whether these newly public companies have the ability to manage investor expectations when indices are no longer rising across the board.