Heard at Horizon: What Fund Managers Want to See in Startup IPOs

Piyush Gupta shares a top 10 list of top-of-mind topics fund managers discussed with growth-stage founders at Horizon, our public market investor conference.

Piyush Gupta

Published April 28, 2023

Over 80 fund managers and research analysts met with founders from 25 growth stage startups last month at Horizon, our inaugural investor conference for portfolio companies considering an IPO.  The event gave public market investors and analysts the opportunity to spend one-on-one time with founders and learn about their businesses and goals. Founders, meanwhile, got a chance to learn more about what public investors are on the lookout for – and how they assess publicly listed companies.

Company building is a marathon, not a sprint – and an IPO is an important milestone that sets the tone for the next critical stage in a company’s journey. Fund managers have a strong shared interest in seeing startup IPOs succeed: they get exposure to new sectors of the economy, as well as the opportunity to make investment gains and outperform the stock market indexes they’re benchmarked against. They’ve also witnessed the journeys of hundreds of public companies, and have valuable insights to share. So we took plenty of notes on the presentations and conversations that took place at Horizon, and distilled this ‘top 10 list’ of notable quotes on topics that investors discussed with founders. 

1. “We want to see consistency in business performance”.

Public markets like relative consistency in business performance. If your startup’s revenue or profits still vary sharply from quarter to quarter, it’s probably better to remain private until greater business maturity is achieved. While investors understand that economic and business cycles impact performance in the immediate term, they still want to see enough data stability to give confidence in the company’s broader trajectory.

2. “Please disclose more metrics so we can understand your business better.”

Many private company founders don’t want to share key metrics publicly because they feel it’s competitive information. But you have to become a lot more transparent when your company goes public. India’s top listed companies routinely disclose key metrics to help investors understand the key drivers beyond their results, and have not lost any ground from just this disclosure. As one investor at Horizon put it: “Frankly, if someone can copy your business just based on the metrics you’ve disclosed, there are not enough moats in your business.”

3. “Hire a seasoned CFO, preferably with public market experience”

Founders typically bring in people with an accounting background to lead their finance function in the early years. This is fine at this stage, but a public company CFO is a much more complex job and requires a different skill set. The level of investor management, board management, and the demands on the finance function, go up dramatically. Fund managers typically want to see a seasoned CFO in place at least six to four quarters ahead of an IPO so they have a good understanding of the business when they discuss the financial results and business performance with investors.

4. “Try to complete any large ESOP grants before the IPO”

This is a comment heard often from public market investors worldwide and we heard it again at Horizon. If you plan to do an extraordinary large ESOP grant, do it ahead of the IPO – not after. Every new ESOP grant impacts dilution, and pushing this cost onto public shareholders will impact share price performance. 

5. “Bring on independent board members who’ve served on boards of other public companies”

While the boards of most startups are composed of founders and shareholder directors, the composition typically changes a year or so ahead of an IPO. At this point, founders start to add independent directors with sector and functional experience. Make sure you have independent directors who have public market experience, and choose directors who round out and complement the experience of your management team. Chemistry also matters – for the independent director, and for the existing board. This takes time, so start this process early on.

6. “I feel concerned when a company wants to make a significant shift in business, or do a large merger or acquisition, soon after IPO”

If you have a game-changing event on the horizon, do it before you go public. Don’t dramatically change your business model or undertake a significant acquisition, right after an IPO. IPOs already carry significant uncertainty as this is the first time that shares of the start up are being tested across a wide base of buyers and sellers. Newcomers to the stock put their faith in the company based on the strategy and vision presented by the leadership team. A sudden change in that story is very jarring to investors. It’s ideal to wait until investors have gained a good understanding of the management team and the company’s strategy, and have developed trust in your team’s ability to execute by seeing at least six to eight consistent quarters, before making any substantial changes to your core business.

7. “Hire a solid investor relations lead.”

A publicly listed company should treat their majority stakeholders – and prospective stakeholders – as they treated board observers when they were a private company, and proactively connect to share updates on business strategy, market conditions and business performance, within the context of public market disclosure parity. As there are hundreds of existing and prospective institutional investors, this is a full-time role, so hire a professional investor relations lead, and share the responsibility within the leadership team. Your IR lead can also help you identify the different types of funds that could be potential investors, learn more about their investment mandates, and maintain those relationships. Remember that funds may have anywhere from 20 to 100 companies in their portfolio. It’s up to you to stay top of mind and build trust so they stand by you, even through tough times. 

8.  “Be measured in guidance and leave room for outperformance”

Fund managers advise founders to give conservative guidance and leave room to outperform those expectations. If you give aggressive guidance and miss forecasts frequently, it will erode credibility. This requires a mindset change for many startup founders, who are used to talking up their game ahead of a fundraise. This is primarily a private-market strategy that doesn’t work in public markets. It’s always better to be realistic and even conservative when you set expectations around future performance. 

9.   “Set your IPO valuation conservatively”

IPO valuation is more of an art than a science. One fact, however, holds true: making or losing money on an IPO has a disproportionate impact on a fund manager’s performance and shapes their view on a company’s ability to launch smoothly into public markets. Founders may want to set a valuation with this in mind.  It’s in their long-term interest to help create a positive halo around the company at the time of the IPO. If a minority of the investors who bought in the IPO see a positive upside, so will the founding team and the majority shareholders who hold the rest of the company. Some companies try to avoid ‘leaving money on the table’ during the IPO valuation process, but their approach may change if they take a longer term view. 

10.  “Weigh the costs and benefit of going wide vs deep with your IPO allocation”

Founders often wonder if they should go deep with fewer investors during the IPO allocation phase, or go wider with a broader base. But when large funds get a small allocation, they don’t have justification for building a model and tracking the company’s performance closely over time. Once such a stock is listed, they are likely to sell the shares and move on. However, if they have a large enough position, they’re likely to be much more engaged with the company and their overall level of commitment is more likely to remain high. In this situation, going too wide during an IPO allocation can negatively impact the company’s market debut.

To read more on how to prepare for an IPO, check out this blog post.