Why Starting a Business for a Big Payout is a Big Mistake, Part 2
Going from “two founders in a garage” to legitimate company
Many cybersecurity companies are founded because a security professional was lacking a tool or tools that could have improved their work. Many times, a person — or small group — uses this as the impetus to start a side project and see if they can build the technology they want. In time, and with enough of a foundation, the decision is made to leave gainful employment behind and become a self-sufficient founder — to see if the product or service can make it on the commercial market. The safety net is gone. The stakes are high. This is more than just a job.
Entrepreneurship should be lauded — it’s absolutely necessary to advance security and society. But it is not a decision to be made lightly. And there is no guarantee of success, especially financial success. At least, not the kind of multi-million dollar exit success I hear would-be founders batting around at times.
In the first part of this topic, I explored market conditions and the commitment required to start a business. In this second segment, I’ll outline just a few of the steps founders have to take if they want to go from ideation to (profitable) exit.
Preparing for an IPO or acquisition
Those up for the challenge of founding a company must do extensive homework. “Build it and they will come” is not a thing in cybersecurity. A company/team can build the greatest, most advantageous product on the market, but without a strategy, solid business plan, advisors, funding, proper documentation, corporate governance, strong sales and marketing teams, press and industry relationships, and on and on, market success is unlikely.
To take a company public in the U.S., also known as an initial public offering (IPO), the executive team must:
Evaluate readiness and objectives: Has the company built a salable product? Has the company reached financial stability and have a steady growth rate? Is a future roadmap in place and technically viable? How will going public help with future operations? What is the long-term strategy?
Enlist advisors: These experienced individuals will be the “IPO Team.” Arguably, any company that hopes to have a successful future will have cemented relationships with advisors and board members long before any exit is planned. But if the company doesn’t have a team of advisors in place already, now is the time to start engaging with product, financial, and legal advisors.
Prepare finances: Work with finance experts to ensure financial statements are in order, properly audited, and comply with generally accepted accounting principles (GAAP). The finance team (internal and external) can also help establish rigorous financial processes and controls that will help facilitate meeting regulatory requirements, and ensure that all financial reporting is factual and up to date.
Select underwriters: Choose the financial institutions that will be the underwriters for the IPO. This selection should optimally happen alongside choosing company advisors, as underwriters will help with financial readiness throughout the process.
Secure regulatory approvals: Needless to say, companies need to obtain numerous regulatory approvals before going public, including those from the SEC and state regulators.
Select stock exchange: Choose the exchanges on which the company will be listed (e.g., NYSE, NASDAQ). Each exchange has its own set of prerequisites for an IPO.
Register with the SEC: File a registration with the U.S. Securities and Exchange Commission (SEC). The SEC will review the registration statement. Beware: it might be a lengthy process that involves multiple rounds and revisions.
Set the price: Determine the initial offering price for the company’s shares based on market conditions and demand.
Determine a communications plan: Communicate openly and honestly to all stakeholders. Different levels of communication are appropriate for different stakeholders, so work closely with marketing, communications, press, legal, and human resources teams to decide on the right strategy.
Schedule a roadshow: Just like selling a product or service to potential users, companies on the verge of IPO will need to prepare and execute meetings with investors to generate interest and belief in the company and its offering(s).
The above is just a sampling of what’s to come. There are many more steps, approvals, and documents that must be prepared along the way.
Acquisitions are similar to an IPO in that they require careful consideration, due diligence, and preparation. Many of the above steps apply to acquisition planning. However, there are some key differences:
Employees: Often, an acquisition involves employee restructuring whereas an IPO will not (at least not initially). Executive teams must develop a plan to communicate the acquisition and its impacts to employees.
Partners, contractors, and suppliers: These stakeholders, too, will need to see and hear transparent and timely communications.
Integration: Acquisitions involve the joining of forces between two companies. This means not only the products or services, but the above mentioned stakeholders as well as the technology estate. The executive team and its advisors must prepare a thorough integration plan that covers how all people and system integration will happen.
Customers: Customers are the reason the company can even begin to think about an acquisition (or IPO in the first place). Messaging to customers — from companies on both sides of the acquisition —including how customer relationships will be handled and/or transitioned is of primary importance.
The wrap up
Although the idea of taking a company from zero to a life-altering financial windfall is enticing, even the cursory description of what goes into starting a company and getting it up and running should make a person think seriously. It won’t be easy to get things going — and “going” is just the beginning.
Setting your sights on a highly successful business — one that is profitable; one that can grow its products and services; one that is highly regarded by prospects, customers, analysts, and funding sources; one that attracts and retains diligent employees — is even harder. Some lucky individuals will end up flush with cash at the end of their endeavor. Many will get a good-but-not-startling return on their endeavor. Others, still, will break even or end up with financial debt.
It is advisable, therefore, to approach startup life as a life-changing endeavor in and of itself. Financial success (if it’s achievable) will be the cherry on top. While it’s in no way wrong to want a secure — or even cushy — financial future, every startup is a gamble and a big bank account is not guaranteed. As the saying goes, “focus on the journey, not the destination.” Because even the hardest and smartest of workers might find that “success” is entirely separate from a seven (plus) figure bank account.