- An IPO requires not only bulletproof financial operations, but also redundancy in key processes and people. Preparation can easily take 18 months.
- While many details must remain confidential, setting internal expectations is key to a successful process.
- Distilling and field-testing the company’s value’s proposition, its essential story, are necessary for a compelling offering.
The road to an IPO starts long before the S-1 filing; here’s what one CFO learned about the process
When Lee Kirkpatrick joined Twilio as CFO in 2012, the telecommunications software startup was full of promise and growing fast. With just $12 million in revenue, however, any talk of going public was far away.
But if Kirkpatrick had any doubts that the startup he had joined was headed for an IPO, they were dispelled quickly. Shortly after he started, he and his boss, CEO Jeff Lawson, sat down for an informational meeting with prospective investors. During the conversation, Kirkpatrick said that he was confident that some day Twilio would get to $1 billion in revenue.
From across the room, Lawson glared. “What do you mean just $1 billion?” Kirkpatrick remembers an irritated Lawson asking him later. “That’s when it really hit me,” Kirkpatrick adds. “I’m working with someone who has a lot of drive to do something transformational.”
Kirkpatrick went on to shepherd Twilio through its successful 2016 IPO. He left the company in December 2018 after helping to put it on a trajectory of sustained growth. At the end of 2019, it was on track to report annual revenue of more than $1.1 billion and to grow another 30% or so the following year; its market value was more than $14 billion at the beginning of 2020.
While the IPO was an important milestone for Twilio, it didn’t happen overnight. For more than two years, Kirkpatrick and his finance team, raced the clock to get the company ready for the scrutiny of the public markets. His behind-the-scenes story helps shine a light on the painstaking work that takes place inside a company long before it gets to tell its story in an investment prospectus.
The case for an IPO: it’s in the numbers
It would be another two years after that investor meeting before Twilio officially began planning for an IPO. Several things had to fall into place first. “Twilio was a good company in a good market with a big opportunity,” Kirkpatrick says. “But the mathematical chance of being successful or hitting a billion dollars still felt small.”
Throughout 2013, however, Twilio’s business began to mature. Late in 2014, as the company reached $100 million in recurring revenue, Kirkpatrick’s team realized the power of the company’s model—which relied on developer adoption—rather than traditional sales, to bring its product to market. “We only found two other software companies, Salesforce and Workday, that achieved $100 million in revenue faster than us,” he says.
That realization was both good and bad. “Twilio was in rarefied air,” he says. But it also meant that its journey to an IPO would probably be shorter than those of others, leaving less time to prepare and less room for error. “It put a lot of pressure on the team to catch up,” he says. That pressure ratcheted up materially in August of that year, when Twilio’s management and board decided to get the company ready for an IPO by the end of 2015—a mere 16 months later.
The decision wasn’t just about giving Twilio increased access to capital or about rewarding early employees and investors with the promise of liquidity. Twilio’s numbers were solid, with high growth rates driven by a mix of new customers and increased spending from existing customers.
But importantly, the board and management viewed an IPO as a way to make Twilio a better partner for its larger customers. Big enterprises were increasingly entrusting their communications systems to Twilio, and the disclosures and scrutiny inherent in being a public company would make it easier for them to trust that Twilio would be around for the long term. In other words, it could be a big point of differentiation from other startups. “Making that completely transparent to our customers was very important,” Kirkpatrick says.
Lee Kirkpatrick, Former CFO, Twilio
Be as transparent as you can
Setting internal expectations about the process and timing of going public at an IPO-bound company is critical, says Kirkpatrick. And yet, executives can’t discuss specifics. Lawson handled that dilemma artfully, he says. Addressing the whole company in January of 2016, as speculation about an IPO among employees and in the press was rising, he laid out the reasons why it made sense for Twilio to become a public company. Lawson also sketched out a general timeline for the company to go public and explained why many of the specific steps had to remain confidential. He also promised to be as transparent as he could, given legal and regulatory constraints. “I believe this clear communication was extremely helpful in keeping the company focused,” Kirkpatrick says.
As he put together an IPO team—it met twice-a-month at first, and then weekly—Kirkpatrick dealt with a similar challenge. The core team included Karyn Smith, the general counsel, and key people from legal and finance, and it had to keep much of its work confidential. But Kirkpatrick also had to educate other executives about the process, especially as more and more of them from areas like engineering, sales and marketing had to be pulled into the IPO team to address issues in their areas of the company. “We brought in executives as needed to advise of the status of key hires, process and control implementation and product releases,” he says. “We were very specific in our communication in three specific areas. For Twilio to go public, we need to make specific hires, meet higher SLA’s and release some additional product features.”
Much of the IPO team’s work was about identifying and filling gaps on everything from IT systems to accounting modules to people. The group came up with a somewhat flip catchphrase to describe its work. “It would be a bad idea for us to be a public company if…” Removing those ifs was its to-do list.
It started with building redundancy in people and processes. “For example, we had some terrific product managers, but if they were spread too thin or represented a single point of failure, that was a problem,” Kirkpatrick says. “When you are a small company, if someone is on vacation, some stuff can be taken care of three days later. That can’t happen when you’re public.”
In many ways, the looming IPO became a forcing function that pushed the company to update its internal controls, checks and balances, and policies. The focus was most intense on areas where the consequences of failure were largest: finance and accounting, IT systems overseeing critical operations, and security. “Understanding your risk across the company and mitigating the risk, that’s what you need to do,” he says.
No issue was too small or mundane. “For example, you have to have a policy for when people leave the company, to make sure that you remove them from all the systems, that their passwords are deleted and that you get everything back,” Kirkpatrick says. “And you have to make it bulletproof.”
Own your story
As Kirkpatrick oversaw IPO preparations, the company kept growing at 70% a year. Perhaps surprisingly, the finance team only grew modestly during that time. That’s in part because the company relied on partnerships, most notably with its auditing firm, that had been established over the years. “Having our audit partners who really understand your business is very important,” he says.
Building trusting relationships with potential investment banking partners and the investor community at large was also a critical part of the job. It was an exercise in both listening and storytelling. Over scores of meetings, Kirkpatrick worked to learn how investors perceived Twilio and how bankers would position it in the market, which helped him identify ways in which Twilio could adjust its message to better explain its business and value proposition.
Twilio was in a unique position. While many investors shun the telecommunications sector because of its high capital demands, Twilio relied on software, not hardware, to deliver its services. Second, while it’s a cloud-based business, Twilio charged customers based on usage, not subscriptions like most SaaS companies. Investors tend to like subscriptions because of their predictability. “I won’t underestimate the amount of investor resistance we were encountering with our model,” Kirkpatrick says.
The solution, he says, was more meetings, more communication, and transparency about why Twilio’s model, whose sales and marketing costs are far lower than most software companies, was in many ways better. “We decided we’re not going to apologize for the fact that we’re different,” Kirkpatrick says. “We’ve got a great model, and we think it’s better. Here’s why.”
Refine the message
The final push came as Twilio was drafting its S-1. To a large extent, it was an exercise in telling the story of where Twilio had been and where it was headed. It was also about gathering customer stories to show how Twilio helped solve problems. And as it turns out, having Lawson deeply involved proved critical for the company.
Twilio is built on software that allows its customers to easily access other companies’ communications networks around the globe. No matter how hard the company tried to explain this, it still felt like a mouthful. As executives hashed out alternative explanations, Lawson pitched in: Twilio, he said, had essentially built a “super network” that sat atop the telecom infrastructure. Everyone nodded. And from then on, “super network” became a key part of how Twilio talked—and still talks—about itself. “Investors got that,” Kirkpatrick says. “And they understood our technology much, much more clearly.”
Lean on your peers
Twilio was Kirkpatrick’s first IPO. While he felt confident about taking it on—having had operational roles and having gone through IPO preparations during the dot-com era, only to see the markets turn against tech— Kirkpatrick says he got enormous help from fellow finance pros. “There’s a terrific network of CFOs in the Bay Area, where people are just willing to help out and be available,” he says. As much as his own board members, they helped guide his decisions and confirm his hunches. They were happy to pay it forward, he says. His advice to CFOs tackling an IPO for the first time: Tap that network, which now counts him as one of its members.
Preparing for an IPO: Lee Kirkpatrick's Tips
-Establish the case for why you should go public
-As you set internal expectations, skew toward transparency
-Identify and fill gaps; build redundancy in critical areas
-Tell your story to investors and customers
-Crystallize your value proposition
-Lean on peers for support
Before joining Twilio, Lee Kirkpatrick served as CFO at four other high-growth companies. At two of those, Ofoto and SAY Media, Kirkpatrick was also COO. Those experiences proved critical, as preparing for a successful IPO is not only a financial but also an operational challenge: Points of failure that may be acceptable at a startup can be disqualifying for an IPO-bound company.