Evolving your equity story for IPO readiness with Scott Dussault, CFO of ReliaQuest

Evolving your equity story for IPO readiness with Scott Dussault, CFO of ReliAQuest

Joe Kornik: Welcome to the VISION by Protiviti interview. I’m Joe Kornik, Editor-in-Chief of VISION by Protiviti, where we explore topics being discussed in the C-suite and executive boardrooms worldwide. Today, we’re joined by Scott Dussault, chief financial officer for ReliaQuest, a cybersecurity technology company based in Tampa, Florida. With a 25-year career in corporate accounting and finance, Scott has held numerous finance leadership roles in high growth technology companies, and he brings extensive experience from both public and private markets. Today, Scott will be sitting down with my colleague, Protiviti Managing Director Charlie Soranno, a leader in our transaction service practice, to discuss IPO readiness. Charlie, I’ll turn it over to you to begin.

Charlie Soranno: Joe, thanks so much, and Scott, thanks for joining me today.

Scott Dussault: Charlie, it’s great to be here. It’s good to see you, as always, and it’s great to have this conversation with you.

Soranno: Let’s get right into it a little bit. I want to touch on the current state of the market, and a little bit about some very focused SEC regulatory relief. The news is very rich about current impending mega IPOs, and that’s been coupled with some very focused SEC relief on certain items on frequent public reporting, easier follow-on and shelf registrations, and then relief over some aspects of Sarbanes-Oxley. So without getting into really technical areas, Scott, perhaps share your thoughts on what the SEC is intending with this relief.

Dussault: Yes, I certainly hope so. I certainly hope this is intended to create relief and more than I, how the IPO market’s — really since the beginning of ’22 and particularly for technology companies, has been pretty limited. And I think there’s a couple of reasons for that. I think private companies are staying private longer and they have access to private capital. It’s easier to get. There’s less restrictions. It’s less costly. So, certainly making it more cost-helpful for private companies to go public is part of this. When I did the two IPOs, each in the last two decades, they’re companies that were fast growing companies, but they were smaller, and it feels like today that the majority of the technology companies that are going out, they need to be north of $500 million in revenue in order to go public, and some are beyond $1 billion, and the growth of those businesses is lower. So, you get this dynamic in the market where I think there’s a lot of desire for growth IPOs, but a lot of these companies that are in that category aren’t able to go out, because it’s either cost prohibitive or scale is not there. So, I think this is a positive measure and I hope it goes through.

Soranno: Yes, awesome. Let’s just stay with that. When you think about that growth aspect and the strategy for capital markets, and the various transaction paths, this would be kind of two-part area, Scott, that I would like to get your point of view on. So, in terms of that equitable — that credible equity story, how should companies think strategically about, in this mega growth environment that you alluded to, how should companies think about selecting banking partners, and then the process, right, over — now you’ve been through — over testing the waters, and analyst days, and the roadshows. How do they do all that to position themselves for a very successful debut?

Dussault: Yes, it’s a great question. I think that the equity story is by far the most important part of any IPO, and making sure that there’s alignment there with your partners and with investors is important for any growth business. When you think about the equity story, there’s really, I think, three components to that. The first is ensuring that you’ve got a very large total addressable market or service addressable market, and it’s large enough, and the market is ripe for disruption. Those are, I think, the two biggest parts of the equity story that need to be communicated. When we did the Demandware IPO — you were a part of that, so thank you — we were a SaaS commerce platform and had two things going for us. One was we had a massive market. Digital commerce, of course, is huge, and we were one of the first cloud providers competing against legacy providers, and that was really impactful for not just our growth, but the story about what that opportunity meant. Similar with me, joining ReliaQuest. I joined ReliaQuest because security operations is a massive industry, and ReliaQuest is a platform that’s an AI SOC platform. It’s been automating activity and securing operations for many years. But with agentic — agentic AI has made data the attack surface, and the need to automate is greater than ever in security operations. Those legacy methods of detection-containment-investigation-response are just too slow, too manual. They rely on workflows that are not automated and there’s a global need for enterprises to automate tier one, two, and three activities in security operations. You’ve got a large market that’s also really ripe for disruption. 

I think the second part of the equity story that’s important, that there needs to be alignment on, is to create a differentiated solution, one that’s embraced by customer use cases. You’ve got to show those customer use cases as part of that equity story, so your advisor should be helping with that, really understanding how are customers using your solution, what are the unit economics and can it scale? 

Then finally, the growth stories have many sustainable vectors to it. So, new logo markets as well as ways to land and expand is key here. And so then, when you think about the right partners, the only need is to really have two bankers, in my view. Right. You have to have two bankers and again execute the IPO, but then you need 10, 15 or more sell-side analysts to not only buy into the equity story, but trust the management team to be willing to support the name post-IPO.

Soranno: Great. In terms of, right, that equity story and how it might play with the exit vehicle, I just want to switch gears a little bit and talk about some of the exit vehicles that have emerged historically in the past that traditional IPO was really the only way to go. We’ve seen a fair amount of SPAC IPOs and then de-SPAC mergers, as you’re aware. In 2021, we saw a fair amount of that, and then a resurgence currently. And then some lesser-known vehicles, direct listing or private capital raise. So, given all that — how important a company’s equity story is and their place in the market —  so given all that, what should companies consider — what is important to consider in terms of the exit vehicle?

Dussault: Again, as I’ve mentioned, I think the equity story is the most important part of a public listing, whether it be traditional IPO, SPAC merger, or direct listing. I think choosing the vehicle is really what's the purpose of the IPO. I think in many ways, the IPO is a branding event. It could be the most important. It certainly was for us at Demandware as we were kind of creating a new, pioneering a new market, a new industry, a new way of delivery. But it’s also a fundraising. So, when you think of traditional IPO, you’re typically floating 10% to 15%, and that puts cash on the balance sheet that could be used to grow the business both organically and inorganically. So, in that case, I think a traditional IPO makes the most sense. I also think a traditional IPO, when done right, can set you up with the right long-term investor base. That’s what that one or two investment bankers will help you with is making sure that you get those right foundational investors, and going through a traditional IPO, we do a roadshow, you do the testing waters before that, and you talk to investors that are long-term holders. That’s what I think a benefit of a direct — a traditional rather — IPO provides for a company. 

I think direct listings work when cash is not required in the business, but it does limit the company’s ability to establish those relationships with institutional investors that are going to be those long-term players. And then finally, you mentioned SPAC, I’ve been involved in SPAC IPOs as well as a board member. They offer more certainty in execution, given the up-front investor commitment, but I do think it still creates some overhang challenges and as it relates to a growth business, has also seen quite a bit of volatility.

Soranno: I would agree with that. What you’ve seen and we’ve done a fair amount of these de-SPAC mergers and it may not be widely known, but in 2021, virtually half the companies that went public through a SPAC never did a de-SPAC merger and haven't returned the monies to their investors. So, yes, appreciate the insight there. So, we’ve talked about kind of a little bit at the higher end of getting ready, and vehicles, and the equity story, and I’d like to get a little bit more granular in terms of true IPO readiness. And so if you think about outside of formal SEC reporting, which if you’re filing an S-1 or an S-4, whatever it is, it’s obviously table stakes from an expertise and execution perspective. So really outside of SEC reporting, what are the most critical infrastructure items, process and people investments that leadership teams can do in advance, and then find out early if a company is truly IPO ready?

Dussault: It’s funny. My partner at EY actually sent me last week a study that they did on IPO readiness, and when you should prepare, and essentially, they say 24 months before an exit. So, 24 months before an IPO, and I think preparedness is the most important part. If you fail to prepare, you’re prepared to fail. So first and foremost to me, the accounting infrastructure has to be right. Everything has to be tight. Repetition has become the standard. Investment and control work and processes, again, you mentioned it, is a table stake. And then from there, do what we do here in RQ — we do what we call scrimmages to ensure that when you are public, the close process, filings, the control work has all become habit. And then they also think about FP&A, right, which follows a very similar path. We talked about the equity story, but the equity model is equally as important. So, that is the outcome of the equity story and it will essentially be how the sell side communicates value to your investors. So, using the equity model to create a “beat and raise” cadence is required well in advance of an IPO. 

So again, we scrimmage those as well, and so investors need to know that what you say you’re going to do is actually what you will do. And especially new public companies, not doing what you say you will do becomes a trust issue that will cause them not to support your name post-IPO. So, the preparedness part, getting ready early, scrimmaging as a private company as if you are a public company is really something that is really a nonstarter. It has to be done.

Soranno: I couldn't agree more, and I think we’re aligned. When we speak to our clients early on in the process, we always talk about the 18 to 24-month window of readiness, and some folks intuitively understand and some folks say why does it take so long, but nonetheless, they quickly find out all the things that need to be done there. I do agree with you strongly that FP&A is a muscle, at least externally facing FP&A, right? Investor relations and the like is a muscle that’s not used really in a private setting, and it really needs to be strengthened, whether you bring in folks from a consulting perspective or you insource with investment relation-type savvy folks to run that FP&A, as well. 

I want to switch to items that are, Scott, probably very much near and dear to your heart on tech and controls, and cyber readiness. As you know, the SEC has put out disclosure information over cyber readiness and the like, and everyone knows that public companies are held to a much higher standard when it comes to technology, security and data. So, which should companies do first if they’re looking to modernize systems or tighten their IT controls, and especially strengthen their cybersecurity resilience?

Dussault: So, they’re both super important. I think systems, to me, goes hand in hand with the accounting table stakes we just discussed. Right. There just are no alternatives. You need to make sure that your systems are tight and doing what they need to do. We talked at RQ about the illusion of choice, meaning if you want to be successful, if you want to win, you have no choice but to do the things you need to do. There are no choices, right. There’s a famous story about Nick Saban at Alabama, when he was coaching Alabama and he got in front of his — a new group of freshmen there, and he had a bag of Doritos in one hand and an apple in another hand, then he said, “Which one would you rather have? Which one do you want to eat?” And of course, your natural instinct is to go to that bag of Doritos, but the reality is, if you want to be successful at Alabama and you want to be a top football program, you choose the apple. You don’t choose the junk food. So, having the right systems in place before an IPO is really the only option. And cybersecurity, to me, is obviously – it’s near and dear to my heart at ReliaQuest, but it’s become huge in today’s environments. Ten years ago, when I did the Demandware IPO, cyber was important, but it was still nascent in companies like ours, companies like Demandware, and it’s just different today. If a newly public company gets hit with a cyber breach, customers know and customers will make buying decisions based on that. So, investors know this, and that becomes another concern if they think that your environment is not secure and customer data is at risk, then they’re going to be hesitant to invest in your company. So, I do think it’s important for both systems, whether it’s accounting or finance, or frankly both, but also the cyber controls in place need to be tight.

Soranno: Now, I couldn't agree more on that, and everyone understands that public company boards have to have financially literate expertise on the boards, and we’re seeing more often than not, and recommending that companies in that space, that you put a cyber savvy person on the board or the audit committee, as well. So, I couldn't agree more.

Dussault: Yes, cyber is now a topic in our audit committee meetings, so it’s definitely different than it was 10 years ago.

Soranno: All right. So, we’re getting ready. So, let’s focus on, hey, what's your company worth, right? So, valuation alignment before the market. So, before formally engaging banks or investors, how do you get every – all the various stakeholders and the new stakeholders you may bring in, how do you get everyone aligned?

Dussault: I have a sign on my desk that says “No surprises” that I got from a former CEO that I worked with many years ago, and that is exactly the valuation surprise can happen a lot in this process. So, I think communication alignment is critical in this topic, Charlie, and I think that’s where the banks and the analysts are key. It’s important to create your comp list early, and it needs to be defendable. You can’t just name the names of the most valuable companies as your comp. There needs to be a correlation to what they are doing to what you are doing. Even if they’re not in the same – if you’re not a competitor or maybe not even in the same market, you need to really get that comp list tight and agreeable, so that there are no surprises when valuation hits the road and you’re actually pricing the IPO.

Soranno: Awesome. So now, we’re ready. We think we valued our company. Let’s talk about a couple of things that may be a little softer, that we’ve seen that’s not a high priority focus area. It’s really private company to public company governance and the existing culture of how that needs to change and kind of board composition. So from those perspectives, governance and cultural, which shifts do you believe, right, Scott, must happen inside the organization prior to an IPO? How should executives approach board building and the right committee formation to align with what the Street’s going to expect?

Dussault: Yes. So, this is an education topic as well, Charlie. As you know, from working with private companies that are looking to go to the public markets, raising money in the private markets is very different than in the public markets. It’s critical for senior management to understand this, get educated on what can and cannot be done and/or said. It’s also critical to create a communications committee, which is obviously something you don’t necessarily need in a private company. Having several members of the company talking to public company audience about the business creates unnecessary risk, because the communication may be different. So, making sure there’s a limited number of spokespeople to that audience is identified early and adhered to post-public. I think it’s similar with the board. Most private company boards are dominated by their investor group, and public company investors want to see a more diversified board. They want to see more independent board members that they know are adhering to the compliance and making sure that there’s good governance there. I think getting those committees formed early is important. The audit committee, the compensation committee, there’s independence rules around both that need to be adhered to, and you just don’t want, again, any surprises when you hit that IPO and that board composition is not what it needs to be.

Soranno: Now, couldn't agree more there, Scott, as well, I do believe getting committee structures in place early is important. I do agree with you also on cultural. Boards are typically focused on investors that are there. The independence and the diversity of putting folks on the boards that could challenge management is extremely important. I totally agree with you. Okay. So now, you’re a public company, right? So now, our hard work really begins, as you know, Scott. So, after an IPO, how should newly public companies evolve their equity story to build that long-term credibility with the covering analysts and outside investors?

Dussault: Yes, I always say in both the IPOs that I’ve been a part as an operator, the IPO is not an exit for the operators. It may be the beginning of an exit for your investors, but it is not an exit for the operators. It’s a funding event. It’s a milestone, but it is certainly not an end, and therefore, the communication, all the work that you did to tell the story before an IPO, all the work that you did to tell a story at the IPO, it doesn’t end at the IPO, right. The communication has to continue and really it’s about consistency and repetition. One of the things that we also say here at RQ is, if you said something once, you haven't said it at all. So, you must continue with that constant and consistent communication with your investor base, and your sell-side analysts that are supporting your name. So, what that means post IPO for a CFO like myself is getting out of my office and working with the sell-side analysts to get in front of investors on a consistent basis. The more they hear the equity story, the more that your unique attributes will come through, the more investors will understand your business and what drives it, and the more trust you’ll bring. Right. Investors, they want to get that face time. They want to see the operators in the wild, telling the story, reinforcing the story, making sure that there’s an understanding there. I’ve always thought it was interesting that private companies are really open about their business with private investors, but then believe in some way, shape, or form that once they become public, they have to be guarded. I think it’s just the opposite. The communication just needs to be broader because your investor base is broader. So again, consistency and repetition when it comes to telling the equity story, when it comes to talking about your differentiators, why you’re going to be successful, is really key.

Soranno: Now, I agree, and what we see often is that consistency which is so important, right? KPIs and non-GAAP measures that are applied consistently over time and you’re not just making up metrics that look good in the quarter that you’re providing, and I know you agree with that.

Dussault: And making sure that the why is understood, right. I think that’s one of the big things, a lot of the companies, when they go public, will pick metrics, either financial or nonfinancial metrics that they think are attractive for one reason or another. You can’t pull things back, right? When you pull things back, you’re going to create a trust issue. Why did you pull that back? To say, well, it’s not relevant anymore is not good enough. It just creates that trust issue. So, what I like to do is make sure that the investors understand why this metric is important, why it’s a big driver for our business, and ultimately, you shouldn’t be talking about any measure in your business if it’s not going to directly correlate to your financials. At the end of the day, I’ve heard that before, “Well, that metric really doesn’t drive our business.” Well, if you’re saying that, then you’ve told them at one point that it was important, and now they’re not going to trust what metrics you want to deliver.

Soranno: Yes, agree. Scott, thank you so much for sharing your expertise with me today.

Dussault: Charlie, I enjoyed it.

Soranno: Joe, back to you.

Kornik: Thanks, Charlie, and thanks, Scott, and thank you for watching the VISION by Protiviti interview. On behalf of Charlie and Scott, I’m Joe Kornik. We’ll see you next time.