Nic Colas: The Ten IPO Commandments

1. Cre­ate The Illu­sion of Scarcity. The biggest chal­lenge to a suc­cess­ful stock offer­ing is to con­vince the base of buy­ers that there is much more demand than sup­ply. Rais­ing the price range of an offer­ing a good sign. Increas­ing the num­ber of shares is much more prob­lem­atic and requires a “Mea­sure twice, cut once” approach. It is, after all, a sig­nal that the sell­ers – who are almost always bet­ter informed than buy­ers – think the price of the offer­ing is com­pellingly attrac­tive ver­sus their knowl­edge of the com­pany and its prospects.
   
   
2. Main­tain a Con­sis­tent and Improv­ing Nar­ra­tive about the Busi­ness. For an IPO, there is a fairly long win­dow between when you FedEx the ini­tial doc­u­ments to the Secu­ri­ties and Exchange Com­mis­sion and the pric­ing of the deal. Months, in fact. Investors’ ini­tial con­tact with the com­pany comes when they read that ini­tial fil­ing. From that point on, they want to see and hear an improv­ing story about the busi­ness and its prospects. If that means keep­ing expec­ta­tions and com­men­tary about the busi­ness mod­est at first, so be it. Tra­jec­tory is every­thing.
   
   
3. Make Man­age­ment Avail­able To Investors. Chairmen/women and Chief Exec­u­tive Offi­cers rarely achieve those posi­tions with­out a healthy dose of self-esteem. And they often bri­dle at being quizzed about their com­pany by investors who know much less about the busi­ness than they do. Fair enough, but it is part of the process and invest­ment bankers need to deliver that mes­sage and get the most senior peo­ple to travel on the road­show. My most mem­o­rable expe­ri­ence with rocks-star man­age­ment was Lee Iacocca, the for­mer Chair­man of Chrysler, and a bigger-than-life per­son­al­ity. The key to mak­ing sure he was happy on the road­show was to sim­ply book the biggest hotel meet­ing space in all the major cities on the agenda. We called him “Sina­tra” and he enjoyed the nick­name. And he was happy to go any­where and meet any­one after sell­ing out the big rooms. Investors appre­ci­ated that, and I believe they cut the com­pany a lot more slack over time because they had seen Sina­tra up close and per­sonal.
   
   
4. Talk to your fel­low under­writ­ers. The best cap­i­tal mar­kets offi­cers I worked with always main­tained an open dia­log with their fel­low lead and co-manager coun­ter­parts. More infor­ma­tion about how the mar­ket hears a story is always help­ful. And yet cer­tain invest­ment banks have a rep­u­ta­tion for keep­ing things very close to vest. Caveat emp­tor there.
   
   
5. Know Who is Buy­ing. “Build­ing a book” is the tough part of any stock offer­ing. How much is “Real” – legit­i­mate orders from insti­tu­tions who want to own the stock – and how much are “Flip­pers?” Sadly for many cap­i­tal mar­kets desks, buy-and-hold insti­tu­tions now trade far less than faster-moving hedge funds. As deals heat up, cus­tomers will try to lever­age their impor­tance to the day-to-day trad­ing oper­a­tion of the under­writ­ers in return for bet­ter a allo­ca­tion.