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Over the years, I have been in situations where I have had to counsel entrepreneurs away from an IPO, I have also watched in sadness as some brilliant startups have lost heavily in their attempt to go public.
Becoming a publicly-traded company often comes with a seductive prestige that draws entrepreneurs towards the concept. and while this can indeed be the key to exponential growth for your business, it is not something to walk into casually.
Every business decision requires some deep thought and considerations but considering the long-term effects of going public and the rapid way in which it changes your business, it requires a little more thought and wisdom. Here are a few considerations for you to have before getting into an IPO.
Can you afford an IPO?
The process of going public can be very rewarding in the long term, but in the short term, it is in fact expensive and lengthy. An IPO is rarely ever completed in less than one year and the heavy costs don’t become apparent until you are knee-deep.
The IPO filing and accounting processes alone range from between $200k to a million dollars. When you factor in marketing, the underwriter’s (investment bank) percentage, and the cost of preparing your company to operate as a public company, amongst other things, few IPO’s are completed without expenditures rising to at least $25 million. This still doesn’t take into account the incremental costs of being public.
The money question is the first and most important consideration because it is needed to start the process, complete it and sustain it, but it is also important because it is a test of maturity. The main reason for an IPO is to raise capital for expansion and to give liquidity to your investors, but in order to do that, you have to first prove to already be financially stable by affording an IPO.
If you find that your business can indeed afford an IPO from its own coffers, it suggests that your business is growing at a steady or rapid rate, and that its final valuation is likely to be favorable to you when shares are made public. This is one indication that an IPO may be a great choice for you.
Is the timing right for an IPO?
If your industry as a whole is in a slump, it might not be a good time to go public. An industry slump will affect both your valuation and Investor confidence. Similarly, it would probably be a great time to go public if your financials are spot on and your industry is in a boom. Take the healthcare industry as an example.
In 2020, due to the pandemic, the health sector was an industry leader in terms of startups. There were startups in every medical area and even adjacent industries, like the cannabis Industry, experienced massive booms, resulting in a number of them executing successful IPOs.
The most graphic example of a company going public at the right time was Cybin, a Canadian mental healthcare company. Cybin went public in 2020 by raising C$88 million, even though it was only started in 2018, a timeframe that is considerably short for most companies.
However, a large contributing factor to being able to go public so fast was how relevant and revolutionary their solution for mental health was in a year where mental health concerns were at an all-time high due to the pandemic.
Timing is a vital key when going public, ignoring this would be to your own peril. You should always have this at the back of your mind; the entire direction of your industry is relevant to the success of your IPO.
Do you have the right executive team in place?
In 2019, WeWork had to postpone its initial attempt at an IPO because its inflated valuation of itself backfired. This was triggered by the realization that the Chief Executive had been a cause for concern to investors for some time.
Its debt was deemed ‘distressed’ and its liability to property owners was in excess of $47 billion. Apparently, venture capitalist injections into the business had been squandered and an IPO had only been sought as a new investment package, similar to what had occurred with Enron a few years ago. Enron had formerly been named “America’s Most Innovative Company” by Fortune Magazine.
Any number of entrepreneurs can play ‘co-founder’ in a private business, but going public is a totally different ball game. Your executive team and board become exposed to greater scrutiny and public opinion. In the age of Twitter, this can affect the success of your IPO and the valuation of your company.
It is pertinent that you set up a world-beating team in your C-suite and even throughout your company before considering an IPO.
Do you have public company experience in your C-suite? What is the business record of your executive team? What is the criminal record like? These questions must be answered in the positive before you consider going public.
Thomas Farey, former President of NYSE, also suggests that private companies should build an investor relations (IR) team and increase their accounting and finance staff before considering an IPO. Your team is extremely critical to the process, where it can make or mar your IPO.
How predictable are your finances?
Every business has great times, average times, and bad times, however, your ability to accurately predict your financial performance and to meet your financial goals over a considerable period of time imbues your company with a relevant index necessary for an IPO; predictability.
Investors require limited risk before investing and this is why an IPO would require extensive disclosure of your financial records. For an IPO to succeed, your company needs to have proven over time that it can predict its financial growth. Hence, one focus you must have as a private company is to develop accurate budgeting and forecasting functions.
An IPO depends on how much room your company still has to grow and how large your market still is. Investors expect their shares to grow in value and not to just inch forward slowly. Accurate forecasting shows that you are in tune with your reality as a business.
The ability to meet or exceed your growth expectations creates very healthy enthusiasm around your company as it goes public.
If your private company is doing great as it is, you may not even require an IPO. The prestige comes with a price. However, if you are looking to make reasonable expansions, invest in R&D, or expand your markets, an IPO might be a great choice, but only if it works.
Going public can grow you or expose you, and it all depends on the work you have done in private before going public.