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This “Tech IPO Pipeline” from CB Insights shows that the SEC still has some work to do if it wants to make public offerings as attractive as private funding or an M&A deal. Maybe the SEC’s recent “testing the waters” proposal will help…but this article says it may be more of a market issue, with money migrating to private markets at an unusual rate. Here’s a summary of the pipeline report from Mayer Brown’s blog:

In 2013, the median time between first funding and IPO for U.S. VC-backed tech companies was 6.9 years compared to 10.1 years for tech companies that went public in 2018. In 2018, tech companies raised, on average, $239 million before undertaking their IPOs, which is almost 1.4x the amount raised in 2017, and over 3.7x as much as 2012 figures.

The mega-round financing trend, wherein companies raise over $100 million per round, was also prevalent in the tech-sector, with almost 120 mega-round financings completed in 2018. Tech-focused private equity firms continue to acquire majority stakes in tech companies that are nearing liquidity opportunities, whether IPOs or M&A exits. However, M&A exits continue to replace IPOs.

Pre-IPO Governance: Institutional Investor View

In this interview, Bob McCormick of PJT Camberview points out that it’s not just private equity and VC investors who are funding large pre-IPO companies – institutional investors are also involved. He asked Donna Anderson of T. Rowe Price how much they care about pre-IPO governance, and here’s what she said:

Our approach is to be consistent: we have principles we believe in, whether companies are public or private. For example, our public voting policy is to oppose certain key board members for any company that is controlled by means of dual class stock with differentiated voting rights. We accompany these votes with an explanation to the company as to why we have concerns with that structure for the long-term. Any features we oppose on the public side, we would not tend to consent to them on the private side either.

But it’s really not about applying a rules-based framework. These private companies are looking to their early investors to be their partners, and that’s the attitude we take. It’s about helping them along the journey, helping them find a governance structure that might be appropriate for them today vs. five or ten years from now. Our role in this is not to be the cops on the beat – it’s a consultative relationship. We’re helping to prepare them, if going public is in their plans, for what that will look like in the world of public shareholders, proxy advisors, votes and shareholder rights.

Pre-IPO Governance: When Do Changes Happen?

When it comes to the pre-IPO governance journey, this survey from Stanford’s Rock Center for Corporate Governance says that most companies start transitioning to public company “best practices” about 2-3 years before they go public. Here’s seven examples of how corporate governance practices evolve from startup through IPO:

1. Companies typically add their first independent director to the board 3 years prior to IPO. This occurs around the same time the company first becomes serious about developing a corporate governance system.

2. On average, companies add 3 independent directors prior to IPO. This number varies widely across companies.

3. 53% of companies go public with founder-CEOs. Companies who bring in a non-founder CEO do so 5 years before the IPO, on average. But most companies say that those leaders were hired to scale the company, not necessarily take it public.

4. CFOs are more likely than CEOs to be brought on as part of the IPO process – typically 3 years before going public. Many companies also transition from a regional auditor to a Big Four accounting firm.

5. An internal GC is the “least necessary” governance feature – many companies rely on external counsel.

6. Executive compensation doesn’t change as companies approach the IPO – and KPIs are common – but it becomes more formalized with financial targets afterwards.

7. Only 12% of founders & CEOs believe the quality of governance impacts IPO pricing – but most agree that having a high-quality governance system is required by institutional investors and the SEC.

– Liz Dunshee