Ipo Readiness
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IPO Readiness: A Case Study Too Soon To IPO? By David Champion Harvard Business Review February 2001, Pgs. 35-46
Real product, real potential. Building a better mousetrap—or titanium extractor—remains the way to a venture capitalist’s wallet, even in a rocky market. Unlike market: it produces titanium, an expensive metal that is very difficult to extract. Founders Diane Ashton and Sundeep Dal discovered a new, less expensive means of extracting titanium from ore. Since titanium is much in demand for its durability and ability to withstand high heat, a large market clamors for it. Although the company needs to perfect the extraction process and adapt it to mass production, venture capital is still available for such a company. VC house Courtney Wills & Rahilly started Ashton and Dal off with $20 million, and metallurgy company Republic Engines enthusiastically contributed to their second round of funding. Titrolyte has made significant progress, yet startup problems remain. It needs ongoing cash infusions to make the extraction process reliable in mass production. Early-stage organizational hurdles. In addition to the important technical issues, the founders face major organizational problems. The skills that led to the discovery of the extraction process bear little relation to the managerial skills required to run a business. The company has fallen short on simple dayto-day management issues. Paychecks bounce because the tiny, two-person accounting department forgets to move money into the payroll account. These oversights simply should not happen in a well-run company, public or private. Titrolyte lacks reliable human resources guidance to monitor legal requirements regarding employees, nor does it have a handle on an appropriate benefits structure or employee communications and compensation. Furthermore, as the company has grown, a rift has developed between the original techie core and later-hired staff. Be wary of going public too soon. While founder Dal and venture capitalist Rahilly would like an IPO this year, co-founder and CEO Ashton disagrees. Going public too soon can create failure if stockholder expectations of early profits fizzle; the company then cannot raise additional cash and may go under despite its good progress on difficult technical processes. The five analysts\ reviewing Titrolyte’s situation agree that an offering now is premature. One analyst—mindful that an IPO transfers power and ownership even as it produces fresh capital and creates liquidity—would use the offering only as a last resort. Girding up before the battle. To preserve founder equity, one analyst suggests the company borrow from a bank. Everyone agrees that venture capital should be readily available, given the real promise of the process. One analyst worries that taking funds from the metallurgy company now could mean sharing Titrolyte’s industrial secrets, which could undermine a later IPO. Another feels that venture capital should offer half the amount an IPO presumably would raise. Titrolyte has developed a profitable testing business as a sideline. Some of the analysts consider this a good way to support the company while it refines its main business in titanium extraction, but one sees this as a corporate distraction that takes resources from the company’s true mission. Everyone agrees on one point: Titrolyte must beef up its organizational structure and management before it undertakes the rocky IPO road. Harvard Business Review, Harvard Business School, Publishing Division, 300 N. Beacon Street, Watertown, MA 02472. Editor’s Note: As is the custom in Harvard Business Review case studies, the company and the named individuals are fictitious, but the analysts—and their advice—are real.
Real product, real potential. Building a better mousetrap—or titanium extractor—remains the way to a venture capitalist’s wallet, even in a rocky market. Unlike market: it produces titanium, an expensive metal that is very difficult to extract. Founders Diane Ashton and Sundeep Dal discovered a new, less expensive means of extracting titanium from ore. Since titanium is much in demand for its durability and ability to withstand high heat, a large market clamors for it. Although the company needs to perfect the extraction process and adapt it to mass production, venture capital is still available for such a company. VC house Courtney Wills & Rahilly started Ashton and Dal off with $20 million, and metallurgy company Republic Engines enthusiastically contributed to their second round of funding. Titrolyte has made significant progress, yet startup problems remain. It needs ongoing cash infusions to make the extraction process reliable in mass production. Early-stage organizational hurdles. In addition to the important technical issues, the founders face major organizational problems. The skills that led to the discovery of the extraction process bear little relation to the managerial skills required to run a business. The company has fallen short on simple dayto-day management issues. Paychecks bounce because the tiny, two-person accounting department forgets to move money into the payroll account. These oversights simply should not happen in a well-run company, public or private. Titrolyte lacks reliable human resources guidance to monitor legal requirements regarding employees, nor does it have a handle on an appropriate benefits structure or employee communications and compensation. Furthermore, as the company has grown, a rift has developed between the original techie core and later-hired staff. Be wary of going public too soon. While founder Dal and venture capitalist Rahilly would like an IPO this year, co-founder and CEO Ashton disagrees. Going public too soon can create failure if stockholder expectations of early profits fizzle; the company then cannot raise additional cash and may go under despite its good progress on difficult technical processes. The five analysts\ reviewing Titrolyte’s situation agree that an offering now is premature. One analyst—mindful that an IPO transfers power and ownership even as it produces fresh capital and creates liquidity—would use the offering only as a last resort. Girding up before the battle. To preserve founder equity, one analyst suggests the company borrow from a bank. Everyone agrees that venture capital should be readily available, given the real promise of the process. One analyst worries that taking funds from the metallurgy company now could mean sharing Titrolyte’s industrial secrets, which could undermine a later IPO. Another feels that venture capital should offer half the amount an IPO presumably would raise. Titrolyte has developed a profitable testing business as a sideline. Some of the analysts consider this a good way to support the company while it refines its main business in titanium extraction, but one sees this as a corporate distraction that takes resources from the company’s true mission. Everyone agrees on one point: Titrolyte must beef up its organizational structure and management before it undertakes the rocky IPO road. Harvard Business Review, Harvard Business School, Publishing Division, 300 N. Beacon Street, Watertown, MA 02472. Editor’s Note: As is the custom in Harvard Business Review case studies, the company and the named individuals are fictitious, but the analysts—and their advice—are real.
