Synchronize Your Watches

Entrepreneur, Nov, 1999 by David R. Evanson, Art Beroff

When it comes to going public, timing is everything.

Initial public offerings are the great brass ring of entrepreneurship. They make you rich; they make you famous for a little while. They offer the unmistakable signal that you and your company have arrived.

But don't confuse matters. Just because you meet with success doesn't mean an IPO is in the offing. Aside from size, scope and industry issues, the timing for an IPO has to be right.

At the broad-brush level, the issue of timing would seem to be a simple one. Is the market receptive to IPOs or isn't it? Timing takes on much more dimension when you're deciding whether to go for the public's gold.

GREAT EXPECTATIONS

Consider the case of Reflective Technologies Inc. Bob Rizika, 33, along with his brother Adam, 37, and his cousin Dan Rizika, 34, developed technology that converts proprietary materials into reflectors and co-founded their Cambridge, Massachusetts, company in 1993. These reflectors, when embedded into fabrics, coatings and other materials, reflect oncoming light in a way that illuminates the full silhouette of the wearer. The technology led to Reflective's first product, IllumiNite, a safety-enhancing reflective fabric that has applications in activewear, outerwear and industrial markets.

After two challenging years of research and development, sales have grown steadily from $600,000 in 1996 to a projected $6.1 million this year. In addition, the company has attracted strong strategic and financial partners along the way: Giant Taiwanese textile manufacturer Formosa Taffeta, for example, made an investment in the company.

In July, Reflective raised $7.5 million in venture capital. According to Reflective's CFO, Stuart Krentcil, funds from the deal were earmarked for, among other things, stepping up production to meet what the company anticipates will be burgeoning worldwide demand for its product.

In many ways, says Krentcil, the firm's latest deal sealed its future fate. After all, investors who make a large financial commitment must someday cash out. Therefore, Reflective will at some point need to consider either being acquired or going public.

If they choose the latter scenario, the Rizikas and Krentcil will have to decide when the timing is optimal. Here are some of the factors they should be considering.

INVESTMENT CONSIDERATIONS

Is the window open? This is the most obvious, and least controllable, factor in a company's decision to attempt an IPO. The opportunities for IPOs are often discussed in terms of "windows" - the window is either open or shut. During the third and fourth quarters of 1998, when the Dow took its precipitous 1,700-point drop, the window was tightly shut. In 1976, there were just 16 IPOs completed. The window, if not shut, wasn't open more than a crack. At the dawning of the second half of 1999, the window was open, as the market was receptive, even eager for IPOs. So the first lesson about timing your IPO is to make your attempt when the window is open. But that's just for openers. Other factors that will enhance your chances of completing a successful IPO include:

* Your industry is in favor. This is almost self-enforcing. That is, if your industry is not in favor, you'll have a hard time even getting an appointment with an investment banker to discuss an IPO, let alone pull one off. Presently, energy companies are out of favor. So are financial-services companies. So are aviation-services companies. If you run a business in any one of these sectors, it's not time for your IPO.

A slightly improved position is being in an industry that is not out of favor. Presently, application software companies, though not as in vogue as they were in the late 1980s and early 1990s, are at least considered palatable. Of course, the best position is to try an IPO when your industry is in favor. For instance, if you run an Internet company, the timing for your IPO couldn't be better.

For better or worse, Reflective defies any easy industry category, meaning it can't be hurt or helped by any such industry favor. The company will have to place more emphasis on other areas, such as underlying markets, management teams or financial performance.

* You are about to turn the corner to profitability. Companies sometimes go public when they're posting losses. You hear about them, not because it's so common, but because it's so uncommon. But there is far less publicity surrounding the slow death the stocks of these companies face, as quarter after quarter of losses pile up and investors lose all interest. It's far better to go public and report ever-improving earnings than it is to go public and report ever-narrowing losses.

Krentcil says that since Reflective is not an Internet company, where the above rules do not apply, the level of profitability will play a vital role in the firm's IPO decision-making process. "We might be able to entice an underwriter into doing a deal now," he says, "but with the better earnings we're projecting, we think we can get a much higher valuation in our deal by waiting a little longer."