The Old IPO Playbook Will Not Work in The New Market

by FEI Weekly Podcast

The 2024 IPO pipeline is looking promising and financial executives need meet the moment.

Earlier this month the FEI Weekly Podcast sat down with Oracle NetSuite’s Ranga Bodla and Sam Levy to discuss the outlook for IPOs in 2024 and the practical implications of using artificial intelligence in the finance suite.

Here are highlights of the discussions that have been edited for clarity.
To listen to the full conversation, click on the player below.

FEI Weekly: I wanted to start off the conversation about the IPO market.
It’s been choppy for a couple of years -- and given the pandemic and just what's been going on in the capital markets -- there hasn’t been a consistent [positive] narrative when it comes to the IPO market.
What's your anticipation for a comeback in 2024? What are you seeing and what are the prospects going into the new year?

Sam Levy: As we look at it and think back 10 years ago, we ran into this bull market all the way up to 2021 where more and more companies were seeking funding, had the chance to go public and take money either through SPAC or through a direct listing. And that all went up through 2020, 2021. Then what we see now, call it the IPO winter, where the offerings for several reasons have slowed almost to a snail's pace.

I think what we're starting to see now in 2024 and as we go forward this calendar year is companies planning. It has been such of the drought, if you will, that in 2024 companies are looking now to re-enter the public market.

That is going to spur a whole series of conversations of readiness. And what we've found is there's a lot of pent-up demand for IPOs and access to capital. There's a lot of dry capital sitting on the sidelines. Companies are now looking at, 'Do I dust off my old strategy? Do I put a new strategy in place where it's zero to six months, six to 12, 12 to 18 months to enter the market?' And now they're looking for strategies to adopt or to get ready for that next move.

Ranga Bodla: We just came out of an IPO Summit that was been going on for 11 years now, and the theme of this year's summit was Embracing Optimism. And I think it's similar to what Sam just described about this is that the last few years have been rough. There have been very few IPOs, not just tech IPOs, very few IPOs in general. And so I think there's cautious optimism. A lot of folks are thinking, 'Okay, what do I need to do and how has that looked different from when the market shut in 2021?'

The metrics or the KPIs that people were being judged on when they went public three years ago are very different to what the metrics are going to be judged on now. Just like all companies out in the public markets, they're all being judged on profitability, how efficient are they and how are they growing? And it's not just about top-line growth, but top-line and bottom-line growth. That's very different than when companies went out in, say, 2021.

A lot of changes have happened. A lot of companies have become much more efficient in preparation for that change. And they're looking at , 'Hey, maybe I can go out later this year, maybe I go next year.' But they're making steps now to make sure they've got the right hygiene in the organization. I mean hygiene in terms of the finance organization, in terms of communication readiness, in terms of technical readiness, all the steps that they need to be a more mature organization that when it makes sense to go public, they can go public, but that they've got the infrastructure in place to do so.

Levy: Here's an interesting point though. We are in the middle of Wall Street and the financial markets here in New York and I think there's a couple of things that you're seeing in the last couple of quarters.
One, the stock market is back and you're seeing this rise within the stock market and stock appreciation, which has been great.

Two is inflation into a controllable macro level at 2% or 3% for the foreseeable future. And I think businesses and investors are starting to see that as positive momentum. Is the Fed going to reduce rates? Yeah. I don't know if it's going to be at the same clip as what they keep talking about as the last increases, but there's going to be that piece of it.

Lastly, most companies have been itching of all those things being done at the macro level, 'Is it time for me to do something different or is it time for me to re-enter the market and re-enter this conversation of where do I get capital?'

FEI Weekly: Can you describe what specifically is different that financial executives need to think about now compared to 2020 or 2021?

Bodla: It's the overall narrative that's changed about being much more efficient. We were at a growth-at-all-cost mentality in 2021 and we’re no longer in that mentality. We are in an efficient growth mentality where the investors, private and public, want to know that the company is being efficient with their spend. They want to know that you're not just going to go top-line growth, you're going to do the bottom-line growth. They're willing to sacrifice a little bit of top-line revenue growth to make sure they get the bottom-line growth, but they want both. And I think that's a real difference. You can't just spend your way to growth. You've got to be much more cautious and efficient with your investors' money.

Levy: And this comes up a lot with the finance office, including the CEO's office. The first conversation generally is around the first P, which is profitability. And so that has become almost the number one driver for a lot of things, is how profitable. Profits were the top two or three always, but what's interesting is the profit margin discussion comes up first, then productivity. The whole rule of the 40 piece of it is, 'Can I be more productive or more efficient? Am I growing that piece of it and am I doing it profitably?'
This is very interesting. In years prior maybe you're rewarded at 30% growth and maybe 10% profit to maintain The Rule of 40, which in software finance circles means that a healthy SaaS company's combined revenue growth rate and profit margin should be equal to or exceed 40%.

Today the discussion is, 'Does it need to be the inverse of more profit and less growth?' So I think that's the conversation for a lot of CEOs and CFOs today is, 'What is our balance, what's our model and what's our priority?'

FEI Weekly: What does that mean for NetSuite customers specifically? Are they going  to shift their mindset from just talking about growth to reporting and putting narrow metrics around profitability? What are you hearing from customers today about what they need in order to go public and bring that information to market or bring that information to investors?

Bodla: The common thread is really about automation. All these threads get very related. One, talent is still very difficult to find, particularly in the finance space. There are a lot of companies looking at technology as a way to bridge that gap.Talent management has been a hot topic or been probably number one, two topic in the finance suite probably the last three years. And now they're saying, there's going to be more, 'Ask the finance department.' The only way to solve it is through technology. So that's one of the conversations that's happening. The second is related to everyone too, buzzword of artificial intelligence (AI).

But the thing about that is the best AI comes from the best data. If you don't have really good data, you don't get data maturity, you're not going to get good AI. And so that's one of the conversations we're having with folks around how you make sure that you've got a really good solid data strategy, a data maturity strategy. You're thinking about how that impacts everything that you're doing and that really becomes the tip of the sphere, so to speak, and making sure you get the strategy there.

Levy: I think those are the systematic approaches. I go back to just the business models. One thing, if we look back at the last three or four years with NetSuite customers, we had close to 275 customers enter an IPO or SPAC, which is enormous.

Some were ready, some weren't. And I think this time around, it's more companies are discussing, 'Is not the market ready? Are we ready as a company?' Meaning, do we have our processes defined? Do we have the systems in place? Do we have the people? Do we have the business model? The markets is one way to accelerate it, but let's not time it on the market. Let's time it when the company is ready.

FEI Weekly: Financial executives have some healthy skepticism when it comes to new technology like AI, and they all want to understand what is the ROI. What is your answer to that?

Bodla: I moderated a panel this week and there were a couple of really key takeaways that I'll bring up.
One was the consideration not to use AI as a way to just shave off a couple of points off of efficiency off your SG&A, because that's not the right approach. You want to think about AI as it relates to, 'Is this going to help me grow and grow faster?' And that's where it'll get reflected. If I can use AI as a way to grow from say 10%, I can grow at 12% or to 12% grow at 20%. That's one way to think about AI.
The second thing on AI is being careful not just to get pigeonholed into just thinking about generative AI. The AI family is quite large and there's a lot of different use cases of AI that can be used today that can help in lots of different ways in terms of preparation, in terms of data. But again, it does come back to the business problem. 'What business problems am I trying to solve and can AI solve that?'

I think the third, and this is probably the most important, which is AI is not going to help drive readiness. It's not going to fix a bad process. It's not going to fix bad data. So if you have bad data, bad processes or immaturity, AI is not going to help that. It's going to make it worse. And so I think that's a really important point is to think, about 'How do I build those readiness capabilities? How do I drive the data maturity that I need? How do I put in place things like controls?' All of those are much more related to the IP readiness piece.

And I need to be thinking about AI. I need to understand it. I need to dive into the technology, but people aren't going to be judging my valuation whether or not my finance organization is using AI to shave a point off of SG&A.

Levy: I think the proper way to coin it is that AI is super exciting as we see it, and it might distract you from the basics of your company.

I think we're all using AI whether we know it or not today in all different shapes. You might go to the mapping system in your phone, it will may map. You might be having a buying experience. And then it's like is AI helping you find the problem? Maybe, I don't know. And I think the one thing that comes to mind about AI is that, well, it's super exciting. How are we going to use it in finance? I think the first thing I would look back to in the analogy was most finance departments have one common system everywhere and that's called Excel. And unfortunately, Excel is not network or secure or scalable.

And so the first transformation that sometimes happens is moving from Excel, from a budgeting aspect of it, for instance, and moving to a financial planning and analysis tool in the cloud. So now we have this shareable model that we can build that's repetitive, etc. That's moving a process to the cloud. Now we can start to build upon that scalability piece of it, identify the problems, et cetera. Once we understand the problem, how can we fix it? I think it's not acceptable as we talk about at the conference, is not to discuss AI and how it's going to relate to our business.