Investor Relations and the Initial Public Offering (IPO)

"Investment bankers date them, while the research analyst marries them." Any sell-side analyst doing an IPO.

The maxim represents an important consideration for a company undertaking an IPO, especially when extrapolated to investor relations. All too often, companies simply outsource their investor relations function during an IPO, as if it is just too much work with little return, given the already hefty work load. The CFO likely feels he or she can handle the investor relations, and likely underestimates what investor relations entails given the help of the investment banks. Establishing a strong investor relations foundation can be the primary driver of a company easily moving from hot IPO to more established cornerstone company within a given industry without skipping a beat.

The role of investor relations in an IPO revolves around capitalizing on the momentum established, by the capital raising transaction. An IPO or capital raise represents an opportunity that moves the company into the investment community's greater consciousness. Once the transaction occurs, investor relations must work to ensure that the company remains in the greater investment consciousness. In our view, IPO companies typically underestimate the value of investor relations and what a well-thought investor relations program can do for the future success of the company. Best-in-class investor relations signals to the investment community that your company cares about, and more importantly, wants to converse and communicate with the investment community. We believe there are several tools a company can utilize to establish such communication with the investment community.

Tools to Maintain Momentum

A company undergoing the IPO process should consider the tools we outline below. Best-in-class investor relations will articulate the importance of these tools, and not only understand how to develop them based on your story, but also convince you of the benefits of an investor relations program that integrates these components.

We believe companies should work to integrate four tools to drive optimal investor relations post-IPO, which include: a well-developed earnings release structure, identifying and reporting on key financial performance indicators, developing a well-thought investor deck, and meeting with investors.

Earnings Release: Best-in-class investor relations can help the company identify the key components of an earnings release and supplement. Providing the most important metrics for analysts helps to ensure investors will continue to care about your story. If you identify the key metrics to build a financial model around your company and continue to provide these metrics over time, investors will be more likely to not only follow you, but invest in the story, too.

The typical earnings release for an IPO company seems to revolve around simply providing some commentary about the quarter, and the integrated financial statements. Most companies fail to capitalize on the opportunity to establish the financial story they want the street to understand and evaluate. Most companies fail to realize that the opportunity exists for the company to establish the financial story on its own terms with the first quarterly earnings reports post IPO.

Developing a strong financial story on your terms that is attractive to Wall Street represents a function of three things:

(1) how does the finance organization at the company model the P&L;

(2) how are your sell-side analysts building their model based on your teach-in, roadshow, and IPO filings; and,

(3) what financial guidance questions / modeling questions are the buy-side asking?

The best investor relations officers can work with the CFO to establish a reporting framework that tracks the most important metrics over time.

Key Financial Metrics: The core component of the earnings release revolves around the business' key financial performance indicators. If a company only provides a basic earnings release the company fails to clearly establish its key financial KPIs. When this occurs, the model structure consensus among your IPO analysts will deteriorate as new anlaysts pick up coverage of your story. A lack of clearly established and identifyable financial KPIs can lead to different analysts developing their own revenue models and possibly developing revenue drivers that are incorrect. The worst situation is when an analyst is left to his or her own devices and ends up developing what seems to represent a sound revenue function, when in fact it may not.

Furthermore, companies seem to overlook the fact that the Street views each company as having a golden metric. The goldem metric represents the one financial performance indicator that the company must always strive to make sure is on track. If you do not establish KPIs, then you are signaling you do not know your golden metric or even important secondary metrics. In this case, if you fail to establish the financial KPIs and golden metric, Wall Street will do it for you, and you may not like the results!

Investor Decks: During an IPO, investor relations should be focused on developing two types of investors decks

(1) the company presentation deck, and

(2) the earnings presentation deck.

First, the IRO needs to develop a strong investor deck that clearly and confidently presents the company thesis in a succinct manner. The company investor deck should typically be 30 slides or less. When an investor deck goes over 30 slides, the company signals to the Street that the company does not really understand / know what they wish to message to Wall Street.

At a high level, the investor deck should be developed such that a buy-side or sell-side analyst can utilize it to initiate on the company over a weekend. The IRO can likely use the IPO roadshow pitch deck as the key starting point. Important components include a company tear-sheet, charts regarding the primary and secondary financial KPIs, important secular growth driver data, total addressable market data, competitive bench-marking, and any necessary financial metrics. In our view, the necessity to include important financial metrics e.g. debt to EBITDA, or Interest Coverage ratios, et al., represents an exception to the 30 slide limit. Over time, the investor deck becomes the company's primary tool to set investor dialogue and thinking about both the company and its industry.

Second, the IRO should consider developing an earnings deck to accompany the quarterly earnings release. The deck should revolve around the primary and secondary financial KPIs identified during the IPO process. The earnings deck should provide a pictorial representation of how these financial KPIs change over time. The slide deck should be simple and separate from the earnings call script. The goal of the deck is to allow the investor to quickly gauge how the company is doing, as well as understand the key inputs for building a model and evaluating the investment.

Investor Meetings: As part of the IPO roadshow, management will spend several days across the major U.S. markets, and in some cases International markets, meeting with the buy-side as they consider participating in the IPO. Given the gauntlet that is an IPO roadshow, management often times feels that they are in a good place regarding investor interaction. Going forward, management will likely participate in a few conferences a year and maybe, go on a non-deal roadshow with an analyst or two. In our view, the optimal investor relations program post-IPO revolves around several conference appearances, as well as several non-deal roadshows (NDR or NDRs).

Chinese Internet companies such as Qihoo 360 and Jiayuan represent examples of aggressive interaction post IPO. Due to reverse merger concerns, Chinese Internet IPOs in the 2010s faced an uphill battle with investors. In order to develop investor buy-in, management spent significant time doing non-deal roadshows over the company's first two years as a public company. The process would entail doing an NDR with each covering analyst across the four primary investor markets (New York, Boston, Chicago, San Francisco). Aggressive travel and interaction signaled to investors that the company not only cared, but wanted both investor interaction and investment in the business.

The job of investor relations revolve around maintaining relevance among investors both during and post IPO. Too often, companies overlook their investor relations function during and after an IPO, and fail to capitalize on the significant opportunity to establish Street credibility.

We hope you find out thoughts helpful, please contact us if you think we can help you!