Changing the focus: product to profitability; Companies doing an initial public offering need to know more than just what the rules are for public companies. Employees need to understand how being public changes the vision, financial goals and responsibilities they now share.

• Author: Post, Penn
• Position: IPOs - Company overview

While brilliant initial public offering (IPO) success stories such as those of Yahoo! and Amazon.com are widely known, the reality for many IPOs is quite different. Studies by Ernst & Young and data from Securities Data Corp. reveal a more realistic picture:

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* Most IPOs perform poorly in the first three years after going public--significantly underperforming the overall market in both operating and share price returns.

* Those that succeed view the IPO as a transformation process, while unsuccessful companies treat it as an event or short-term financial transaction.

* In retrospect, 62 percent of the executives in unsuccessful companies considered themselves ill-prepared for their IPO.

Why do so many IPOs wind up with these results? One reason is that companies going public through IPOs face two challenging and concurrent transformations. First, the business evolution required to add profitable growth, positive cash flow and shareholder value to their technology and product focus; and second, a cultural transformation from a private company or internal division of a large company to a stand-alone public company.

IPO executive teams face four critical challenges: 1) building and maintaining investor confidence to attract capital; 2) maintaining company value through the IPO process and beyond; 3) preparing the organization and employees to manage a public company that meets the profitable growth, return on investment and cash flow expectations of shareholders; and 4) executing the transition to a financially focused public company.

Building and Maintaining Investor Confidence

Attracting investment capital requires the new company's executives to demonstrate that they understand the investors' financial return and risk requirements, and are able to convince prospective investors that the new company will satisfy those requirements.

They must demonstrate how the new company will be competitive, profitable and generate shareholder value in the short- and long-term. In addition, quick and confident responses to questions or concerns raised by securities analysts, investors and lenders (in financial terms) must become second nature to them.

Realistic plans are required to manage the critical transformation from a parent corporate culture to an entrepreneurial culture. Executives need to prove that their business model, strategy and operating plans will provide outstanding customer value, sustainable competitive advantages in technology, products, innovation capability and a highly skilled and engaged workforce. Stringent regulatory requirements such as Sarbanes-Oxley must also be met.

At this juncture, the CFO plays a vital role as a presenter and supporter of other executive presentations, Q & A sessions with securities analysts, investors and lenders.

Maintaining Value During the IPO Process and Beyond

Extraordinary cooperation on multiple levels can make or break...