About a year ago, Nubank debuted in the New York Stock Exchange (NYSE) and wrote a new chapter in Latin America's startup ecosystem history. The digital bank not only raised US$ 2,8B, the IPO was also the largest dually-listed IPO globally since 2012, being the first IPO in the US with a simultaneous listing in Brazil.
In line with Nubank’s mantra to democratize financial services, Nubank’s stock market debut not only attracted 800.000 retail investors in Brazil by offering Brazilian Depository Receipts (BDR’s), which was the largest number of retail investors in a Brazilian IPO ever, but also executed one of the largest Directed Share Programs (DSP’s) in the world with 7.5 million people enrolled in the NuSócios program, which was the first-ever donation program allowing customers to participate in an equity offering in Brazil.
I had the opportunity to be a part of the team leading Nubank's IPO, as the company's Investor Relations Officer. Here's what I learned from this experience that could be useful to other startup founders considering the IPO route.
Nubank was founded in 2013, but its IPO process only started in mid to late 2020. So while it may not look like it, Nubank took longer to go public than most tech companies do. If the tech company is successful, it usually goes public within 3 to 4 years of founding. Or even earlier in some cases, as we saw during the covid-19 pandemic.
Let's remember that Nubank had the luxury to keep raising funds in the private markets – from firms that had deep enough pockets, were aligned with the founder’s long-term vision, and could give Nubank the runway it needed to keep focusing on the business. It also allowed them to work with the right management team, who was seasoned and had been previously at companies with multiples the scale that NU has today (NU went through meaningful changes in its senior management team between 2019 and 2020). This positioned them very well to have solid foundations both from a product/technology perspective and an operational, financial, and infrastructure standpoint as well . And that led to a sustainable IPO, based on sound operations and financials.
But why even do an IPO, if private funding and other exit options were available? The IPO was the right move for the company in my opinion – and that's because Nubank is a category-defining business that is built to last, just like MercadoLibre is (my previous employer). I have full conviction that NU is a company that can generate far more impact to society and value to shareholders as a stand-alone mega-cap publicly listed company, and not as an acquisition target of an incumbent bank or another tech company.
We were also navigating the peak of the pandemic when we were going to launch the IPO, and investor interest in high-growth names like NU was at an all-time high. Hindsight is always 20/20, but looking at it with today's optics, the timing could not have been better. If Nubank would have tried to go public in 2022, it would have been very challenging to raise what Nubank raised in 2021, and at the valuation it did.
Considering the company's culture, purpose, stage of maturity, and market timing, I think the IPO was the right call for Nubank.
Having said that, not all tech companies will be category-defining or have addressable markets as large as Nubank does. And maybe, in other cases, an IPO is not as clear or as right of a move. That's very important to keep in mind for founders – and we'll talk about this right now.
I would say the most important factor is the stage of maturity of the business.
Getting the founder-market fit and the product-market fit right is critical before embarking on an IPO as well. That generally happens between the Seed and the Series A rounds.
Moreso, a startup should scale up and try to raise a few private rounds, like up to Series C or D, before even considering an IPO. Even if they could already do a SPAC (by the way, most are crashing and burning). Nubank was a bit of an outlier, as they went as far as a series G-1 with Berkshire – although for them I think it was the right move, as staying private for longer allowed them to have not only the right products in place but also as previously mentioned, the right management team and financial model to go public.
Finally, it would be the wrong move to go public before having sustainable unit economics on a product basis (e.g. profit and loss statement by product) and a seasoned FP&A, tax, legal, controllership, and IR teams. Not having the right team could make an IPO a failure. And a bad IPO could be a negative milestone that might take some time to recover from in terms of brand reputation and ability to attract and retain key employees and investors.
Besides founder-market fit, product-market fit, evidence of scale, sustainable unit economics, and the right team, here are other metrics you should strive to achieve before doing an IPO:
- SAM (Serviceable Addressable Market), SOM (Serviceable Obtainable Market), and TAM (Total Addressable Market);
- Ability to cross sell as a multi-product platform and a multi-country platform to expand addressable market (in Nubank’s case, that entailed the launch of credit card, Nuconta, Personal Loans, SME Accounts, Insurance, NuInvest, and NuCrypto as well as expanding into Mexico and Colombia);
- Traction on customer retention metrics on a cohort basis (e.g., customer retention by cohort, net revenue retention by cohort);
- Clear understanding of LTV/CAC dynamics, including what assumptions are being used and what is the payback period on a cohort basis. Tech companies should be prepared to explain granularly the rationale behind how these metrics were calculated, what they mean for the business, and how they can improve over time;
- Corporate governance structure. Have a solid corporate governance structure that is best-in-class. Otherwise, it may prove difficult to generate comfort in attracting world-class investors to your cap table. Nubank went above and beyond the traditional Foreign Private Issuer (FPI) requirements, for example;
- Supporting data to justify pre-IPO valuation. Investment banks come in very handy here as they have a broad view of the market. Nubank used the following: multiples (including growth-adjusted basis) of EV/Revenues and EV/Gross Profit. There was a preference for EV/Gross Profit in Nubank’s case, as it reflected the most comparable measure across peers of different sectors/verticals. In Nubank’s case given that no perfect comparable existed, they looked at 2 groups of fintechs: 1) consumer fintechs (Tinkoff, Kakao Bank, Kaspi, Affirm, Sofi, Square, PayPal, and Robinhood); 2) digital payments/e-commerce (Shopify, Adyen, Marqueta, Sea Limited, and those with geographical proximity, such as MercadoLibre, PAGSeguro, Stone, and Inter).
This is not an exhaustive list, but these are some of the milestones from a due diligence perspective if you want your startup to go the IPO route:
By signing an underwriting agreement, an investment bank acts as a broker between the issuing company and the investing public, to help the issuing company sell its initial set of shares. There are three different types of underwriting arrangements:
1. Firm Commitment
Guarantees the company that a particular sum of money will be raised.
2. Best Efforts Agreement
It only sells the securities on behalf of the company.
3. All or None Agreement
Unless all of the offered shares can be sold, the offering is canceled.
4. Syndicate of Underwriters
Public offerings may be managed by one underwriter, a.k.a. sole managed, or by multiple managers. In the case of Nubank, there were multiple managers, and one was selected as the lead/book-running manager (Morgan Stanley). Under such an agreement, the lead investment bank (MS) forms a syndicate of underwriters by forming strategic alliances with other banks (GS, Citi, Allen & Co, HSBC, etc.), in which each of them sells a part of the IPO.
1. Engagement Letter
The Engagement Letter includes a reimbursement clause (covering that the issuing company will cover expenses incurred by the underwriter if the IPO is withdrawn during the process) and The Gross Spread underwriting discount (which is the difference between the price at which the underwriter purchases the issue and the price at which they sell the issue).
2. Letter of Intent
In the Letter of Intent, the syndicate commits to enter into the underwriting agreement, and the issuing company commits to 1) provide the underwriters with all relevant information and fully cooperate with due diligence efforts and 2) include an over-allotment option (up to 15% more shares than initially planned). This last commitment is also called the green shoe option.
3. Underwriting agreement
The Letter of Intent remains in effect until the pricing of the securities, after which the Underwriting Agreement is executed. Thereafter, the underwriter is contractually bound to purchase the issue from the company at a specific price.
4. Registration Statement
The Registration Statement consists of information regarding:
The SEC requires that the issuing company and its underwriters file a Registration Statement after the details of the issue have been agreed upon. The registration statement has two parts:
1. The Prospectus
The Prospectus is provided to every investor who buys the issued security (F-1 for FPIs or S-1 for US-domiciled companies);
2. Private Filings
The Private Filings are comprised of information provided to the SEC for inspection, but not necessarily made available to the public.
The Registration Statement ensures that investors have adequate and reliable information about the securities themselves. The SEC then carries out a due diligence process to ensure that all the required details have been disclosed correctly.
It is of utmost importance to have backup data for every single number or data point on the Prospectus and Private Filings. Starting this process late could derail the whole process and gathering backup data for the filings should not be underestimated.
There were multiple work streams going on at the same time that had to come together for the IPO to come to fruition. And these workstreams intensified in complexity, since we were doing a dual listing in NY and São Paulo simultaneously. Here are some of the challenges we faced during our IPO, and that you can learn from:
- Choosing the underwriting syndicate in a timely fashion
Select the underwriting syndicate as soon as possible once the decision to IPO has been taken. I cannot stress how important this is to file all regulatory documentation on time. Nubank's execution for the IPO was almost flawless, but in hindsight, I believe if we would have done this step a few months earlier, it would have put a lot less pressure on all of the parties involved (both internal and external).
And by that I mean the management, the IPO team, and the underwriting syndicate responsible for filing the prospectus to the SEC & CVM; selecting an external legal counsel, which involved firms in Brazil and US due to the dual listing; and doing all the mapping of the associated deadlines, workstreams, and documentation that come with an IPO.
- Planning, allocating, and coordinating internal resources & workstreams
We needed to organize and align the legal, accounting, FP&A, and tax teams to make the filing of the Brazilian Prospectus (Formulário de Referência) and the US Prospectus (F-1) a reality.
Usually, there are at least two confidential filings with the SEC before it flips public. NU did 3 confidential filings, which is rare, but sometimes useful to iron kinks before flipping public.
- Building the right narrative and storytelling to go out and pitch investors during the Testing the Waters period (TTW).
Companies need to quickly get feedback and adjust to get ready for their IPO roadshows after doing the TTW meetings. This is of utmost importance because it will be probably the only opportunity to get feedback from the investors that may participate in the IPO before you go live, on the real roadshow. Getting input from the investment banks participating in the IPO is also critical, given they tend to have a broader view of what investors are looking for.
- Working with the underwriting syndicate and internal teams to build a solid analyst day presentation, and allocating management time accordingly.
This includes the CEO, CFO, COO, CTO, and any other business head that is key to the business drivers. It is of utmost importance to onboard the sell-side research analysts who will cover you post-IPO and be available for their questions.
Sell-side analysts need to understand the puts and takes of the business as granularly as possible, since it is them who will be pitching your name to hundreds of investors and answering many of their questions about the business. Doing a poor job here could cost the company dearly in terms of the high-quality investors that could have an interest in your stock.
- Investor targeting to build a solid cap table to navigate the life of a company in the public markets.
Many of these investors might want to come in at a lower valuation in exchange for bringing more than just funds – such as the know-how to navigate a specific industry, competitive information, and the mental fortitude to not be spooked away by quarterly results (the most important thing, btw). But just to be clear, that doesn't mean founders should not look at the short term. You arrive in the long term by delivering in the short term.
Poor investor targeting may result in a higher valuation at IPO, but a much more volatile cap table and consequently a lower valuation over time.
World-class companies tend to have quite stable top 20 investors for a reason. It does not happen out of thin air.
Besides, if the company is successful, it is very likely it will tap capital markets more than once – and having credibility in the street and a solid investor base will make a difference when it’s time to raise money again.
- Designing and executing Nu’s Direct Share Program (DSP).
As mentioned earlier, this was among the largest DSPs in the world. 7.5 million people enrolled in the NuSócios program, which was the first-ever donation program allowing customers to participate in an equity offering in Brazil, while 800 thousand people made a paid reservation, the largest number of retail investors in an IPO in Brazil ever.
Both initiatives brought significant complexity, not only from a product and technology standpoint but also from a legal & regulatory standpoint, since many pieces of the program had not been done ever at this scale in Brazil.
My advice for any founder trying to do the same here is, one, to clearly understand the value of doing this for his business, and two, to start this process as early as possible, both from a product viability and a legal & regulatory standpoint once the decision is made to move forward.
This is a complex process that requires the involvement of multidisciplinary teams, and will add significant workload to both internal and external resources to make sure the initiative is a success. It could be a process that, given the existing talent pool and financial resources of the company aspiring to IPO, may make sense not to do it and focus on the execution of the core fundraising process.
From some engagement I’ve had with founders, I think they romanticize a bit getting to an IPO. And it is important to demystify this. Founders must understand that an IPO is not the objective in and of itself, but just another stage in the life of the company they founded.
If this process is taken only as a means to a liquidity event, then probably neither the founder nor the company is ready for an IPO. Another important point here is that it requires significant time from the founding team, that will with no doubt take time from the business and the execution.
Communicating to employees early on that, although an IPO is a liquidity event, it may not go initially as expected in the short term due to instances beyond the control of the company. The stock can go down on IPO day because of external market conditions. But over the long term, the business will show good fundamentals if the focus on execution continues as a company. Multi-billion-dollar businesses take time to build and this must be understood as much by the employees as well as all of its stakeholders.
Miscommunication here could cost the rotation of key employees. Compensation issues may arise, as pre-IPO employees are enticed by the equity they can get as early employees (RSU compensation). Nubank did a great job in this respect through internal communications early on. The sooner this is communicated to all involved parties, the better.
It is also important for employees to have a clear understanding of the consequences of communicating the company is going public before it is legally possible to give any indication of an IPO (via social media, in social interactions, or any means). It could jeopardize the entire IPO process and cause serious reputational damage to the company. This should be specially drilled down to the founding team as well since they usually engage a lot with the press.
From an investor relations standpoint, having a Cayman requires no Quarterly or Current Reports, and in that way reduces reporting complexity. Specifically, Foreign Private Issuers (FPIs) don't need to file quarterly reports on Form 10-Q or current reports on Form 8-K.
However, for Foreign Private Issuers listed on the NYSE, such as Nubank, NYSE requires the filing of semiannual unaudited interim financial information covering the company’s first two fiscal quarters. Even so, Nubank follows best practices and files quarterly reports, as its shareholder base is mostly US/Europe-based and quarterly results are expected.
Again, this is not exhaustive. But there are some other points about having Foreign Private Issuers when IPOing that I find relevant:
- Dodd-Frank Act exemptions
Several key corporate governance reforms of the Dodd-Frank Act do not apply to foreign private issuers, including those related to proxy statement matters, such as say-on-pay and golden parachute disclosure; voting and disclosure relating to chair/CEO overlaps; and performance-to-pay ratios.
- GAAP flexibility
In preparing its financial statements to be provided to the SEC, a Foreign Private Issuer can choose among US GAAP, non-US GAAP (with a reconciliation to US GAAP), or the International Financial Reporting Standards (IFRS).
- Reduced executive compensation disclosure
Foreign Private Issuers may provide significantly reduced executive compensation disclosure compared to S corporations (a common type of legal entity recommended for small businesses, which carry the tax advantages of partnerships while providing the limited liability protections of corporations) or C corporations (a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity and are also subject to corporate income taxation). For example, FPIs can provide aggregate rather than individual disclosure of executive compensation.
- No accelerated filing
A Foreign Private Issuer using a Form 20-F annual report may file the report up to 120 days after the end of the fiscal year.
- Exemption from Regulation FD.
Regulation FD expressly exempts Foreign Private Issuers from its requirements. FPIs are not obligated to make simultaneous or prompt public disclosure of material nonpublic information.
Even so, many foreign private issuers comply with Regulation FD as a “best practice”. To do otherwise could be the basis for liability because of a violation of US and foreign securities law. It would not be a violation under Regulation FD, but under the long-standing principles that form the basis of the regulation.
- NYSE and Nasdaq corporate governance exemptions
Foreign Private Issuers listed on the NYSE or Nasdaq are generally exempt from most of the exchanges’ corporate governance rules, other than the SEC Audit Committee requirements, to the extent not required by the issuer’s home country laws.
The exemptions cover, for example, independence determinations, compensation and nominating & governance committees, and certain shareholder approval requirements relating to equity-based compensation plans and issuances of shares.
But remember: Foreign Private Issuers are required to disclose how their corporate governance rules materially differ from those of U.S. companies.
And if you decide to do an IPO as Cayman FPI, I would strongly encourage you to commit to advancing best-in-class corporate governance standards, as Nubank did. Doing so will set your company apart from most other Foreign Private Issuers.
Some of these corporate governance standards include the set-up and staffing of its main governance bodies (Board of Directors, Audit and Risk Committee, Leadership Development, Diversity and Compensation Committee, and Stakeholders' Committee) with world-class professionals and an independent majority.
A dual class shareholder structure would also be important in founder-led companies. In my opinion, it allows founders to pursue their long-term vision, rather than facing pressure to focus on short-term results, which could be detrimental to the business in the long-term.