IPO Readiness: A Case Study

Too Soon To IPO?

By David Champion
Harvard Business Review
February 2001, Pgs. 35-46

Real product, real potential. Building a better mousetrap—or titanium extractor—remains the way to a
venture capitalist’s wallet, even in a rocky market. Unlike market: it produces titanium, an expensive
metal that is very difficult to extract. Founders Diane Ashton and Sundeep Dal discovered a new, less
expensive means of extracting titanium from ore. Since titanium is much in demand for its durability and
ability to withstand high heat, a large market clamors for it. Although the company needs to perfect the
extraction process and adapt it to mass production, venture capital is still available for such a company.
VC house Courtney Wills & Rahilly started Ashton and Dal off with $20 million, and metallurgy
company Republic Engines enthusiastically contributed to their second round of funding. Titrolyte has
made significant progress, yet startup problems remain. It needs ongoing cash infusions to make the
extraction process reliable in mass production.

Early-stage organizational hurdles. In addition to the important technical issues, the founders face
major organizational problems. The skills that led to the discovery of the extraction process bear little
relation to the managerial skills required to run a business. The company has fallen short on simple day-
to-day management issues. Paychecks bounce because the tiny, two-person accounting department forgets
to move money into the payroll account. These oversights simply should not happen in a well-run
company, public or private. Titrolyte lacks reliable human resources guidance to monitor legal
requirements regarding employees, nor does it have a handle on an appropriate benefits structure or
employee communications and compensation. Furthermore, as the company has grown, a rift has
developed between the original techie core and later-hired staff.

Be wary of going public too soon. While founder Dal and venture capitalist Rahilly would like an IPO
this year, co-founder and CEO Ashton disagrees. Going public too soon can create failure if
stockholder expectations of early profits fizzle; the company then cannot raise additional cash and
may go under despite its good progress on difficult technical processes. The five analysts\ reviewing
Titrolyte’s situation agree that an offering now is premature. One analyst—mindful that an IPO transfers
power and ownership even as it produces fresh
capital and creates liquidity—would use the offering only as a last resort.

Girding up before the battle. To preserve founder equity, one analyst suggests the company borrow
from a bank. Everyone agrees that venture capital should be readily available, given the real promise of
the process. One analyst worries that taking funds from the metallurgy company now could mean sharing
Titrolyte’s industrial secrets, which could undermine a later IPO. Another feels that venture capital should
offer half the amount an IPO presumably would raise. Titrolyte has developed a profitable testing
business as a sideline. Some of the analysts consider this a good way to support the company while it
refines its main business in titanium extraction, but one sees this as a corporate distraction that takes
resources from the company’s true mission. Everyone agrees on one point: Titrolyte must beef up its
organizational structure and management before it undertakes the rocky IPO road.

Harvard Business Review, Harvard Business School, Publishing

Division, 300 N. Beacon Street, Watertown, MA 02472.
Editor’s Note: As is the custom in Harvard Business Review
case studies, the company and the named individuals are fictitious,
but the analysts—and their advice—are real.