Photo by David McBee
According to Pitchbook, a leading financial data provider that covers global venture capital, private equity (PE) and public markets, private equity’s IPO pipeline is filling up after a slow 2019. The number of private equity-backed IPOs in the US, according to PitchBook’s 2019 Annual US PE Breakdown, dropped 50 percent year over year in 2019, going from 46 to 23.
So what has been driving the trend? It comes down to persistent global talent shortages across the C-Suite in many industries and functions, including finance, healthcare and biotech, digital and technology. Specifically, there is a lack of available CFOs that can transition a company from the private markets to the public markets.
By 2018, it was well documented that there was a shortage of experienced CFOs in the Bay Area. To respond to this trend, PE and venture capital (VC) firms resorted to searching outside the Bay Area, investing in the future by starting CFO accelerators, and relying on fractional CFOs wherever possible. While some succeeded, many are still looking for qualified CFOs that can fill this extremely important role of taking private companies public.
The status quo is difficult. Today, we are looking at a national shortage of experienced CFOs. Notwithstanding this fact, 2019 was a great year for IPOs. At least 159 companies went public, including Uber (UBER), Beyond Meat (BYND), and Peloton (PTON).
“2019 was a boom year,” said Shawn Cole, the President of Cowen Partners Executive Search. “However, most of the good ones (CFOs) are already taken. With 2020 shaping up to be a rush of IPOs, many CFOs are not leaving anytime soon.”
What Does This Mean?
Ultimately, an IPO filing is all about timing. With a rush of IPOs in early 2020, fears of an economic slowdown, and an election year, the clock is ticking. Having an experienced CFO at the helm is critically important to the success of the public offering.
According to a Radford Consulting Study, “Unlike chief executive officers and product development executives (who often nourish a startup from infancy to an IPO), CFOs are generally on-boarded much closer to an offering.” A 2020 study by Hunt Scanlon Media also states that “Private equity-experienced chief financial officers continue to be in high demand.” Recruitment firms are busy trying to find these CFOs and pair them up with startups that are ready to enter the public markets.
The demand from private equity and venture capital firms for IPO-experienced CFOs is only growing. This isn’t only a phenomenon in the Bay Area. It is happening throughout the country. Companies preparing to go public are scrambling to find CFOs that can not only navigate the IPO process, but can help their companies thrive in the public markets.
For example, Fundbox recently hired a finance chief with a capital-markets background. A Fundbox spokesman stated that they targeted this particular CFO due to his expertise in capital markets and investing. At its core, the company wanted someone who had experience with the IPO process.
Fundbox isn’t alone in recognizing the power of an experienced CFO to shepherd a company into public markets. Some of the biggest tech unicorns chose to hire new CFOs amid increasing IPO rumors. Those companies include Airbnb, Instacart, Shopkeep, and more. As public markets get more skeptical about these unicorns going public (just look at the WeWork example), these experienced CFOs will be even more valuable.
Finding qualified CFOs isn’t just a problem in the United States. According to Cole, experienced CFOs are needed by startups in other countries who will soon become public companies. “We have a fair number of PE-backed software clients filing in international markets, such as Australia, Germany, and Japan,” he said.
That said, international waters further complicate the matter. Choosing to file internationally demands a CFO have specialized experience in a foreign IPO process, International Financial Reporting Standards (IFRS), and foreign tax laws. Those CFOs who have this experience, however, can make the process much easier. Limeade Inc (LME) is a great recent example. Filing in December 2019 on the Australian Stock Exchange (ASX), the company’s CFO and accounting team had prior ASX experience. This made the filing experience much more seamless, allowing the entire team to focus on delivering substantial value to its shareholders.
The War for Talent
According to the AICPA’s Business and Industry Economic Outlook Survey, talent remained the biggest challenge facing companies in the fourth quarter of 2019. This is the tenth straight quarter where talent has been the most substantial challenge. CFO searches aren’t immune to these challenges. They are plagued by the availability of a tight labor market and the lack of qualified candidates.
Essentially, shareholders know that past experience is the best indicator of future success, which is why companies want to hire an experienced CFO who has done it all before. When a company decides to file, CFOs are the steward of the IPO process. They can make or break a company’s initial public offering.
As a solution, studies show there is little difference in compensation between tenure and when a company files an IPO. Ultimately, private companies may want to consider hiring an experienced CFO sooner than planned in order to identify qualified candidates who can own the IPO process and create substantial value as the company grows. While the task isn’t easy, getting started today can save your company from substantial headaches in the future.