Over the years, I have had to advise entrepreneurs beyond an IPO, and I have sadly observed that some brilliant start-ups have greatly lost in their efforts to go public.
As a publicly traded firm, entrepreneurs also gain a seductive reputation in the idea. And while this might be the secret to your company’s exponential growth, it’s not anything to go lightly.
Every business decision needs a deep understanding and consideration, but given the long-term consequences of going public and the speed at which your business shifts, a little more thought and knowledge are needed. Here are a couple of things you need before you enter an IPO.
You can afford an IPO?
The public process can be very satisfying in the long run, but it is actually costly and lengthy in the short term. An IPO is seldom done in less than a year, and once you are knee-deep, the high cost will not become evident.
The processes of IPO filing and accounting alone vary from $200 to $1 million. If you are involved in marketing, the percentage of the underwriers and the costs of preparing the business to function as a public company, inter alia, few IPOs are concluded without expenditure up to at least $25 million. The marginal costs of publicity are also not taken into account.
The issue of money is the first and most critical factor, because it is necessary to start, complete and maintain the process, but also because it is a measure of maturity. The key reason for an IPO is to increase expansion capital and provide your investors with liquidity, but in order to do so, you must first prove to be financially secure with an IPO.
If you find that your company can actually afford an IPO in its own banks, it indicates that your company is the steadily or rapidly, and that its final value is likely to be beneficial for you when shares are made public. This shows that an IPO can be an excellent option for you.
Is the time for an IPO correct?
If your whole company is in a downturn, it might not be a good time to go public. A recession in the industry would impact your assessment and the trust of investors. Similarly, if your financials are on the spot and your market is booming, it will definitely be a good day to go public. Take as an example the healthcare sector.
In 2020, the health sector was a market leader in start-ups due to the pandemic. In each medical sector, start-ups and even neighbouring industries like the cannabis industry have experienced huge booms, leading to many successful IPOs.
The graphic illustration at the right time of a public corporation was Cybin, a Canadian mental health company. Cybin was made public by raising C$88 million in 2020, despite the fact that it only launched in 2018, a period that is significantly short for other businesses.
However, it was important to know how relevant and innovative their mental health solutions were in a year when mental health issues were at an all-time high as a result of the pandemic.
Timing is a critical key when you go public and ignore it at your own risk. You should always keep this in mind; your industry’s entire trajectory is important to the success of your IPO.
Have you the right management team in place?
In 2019, WeWork had to postpone its first attempt at an IPO due to a backlog of the inflated assessment. This was caused by the realisation that the CEO had been a cause for investment concern for some time.
His debt was considered “stressed” and his liability was over $47 billion for property owners. Apparently, venture capitalist injections were squandered in the company and an IPO was pursued only as a new investment package, as happened with Enron some years ago. Enron had previously been called Fortune Magazine “America’s Most Innovative Business.”
Many entrepreneurs can play a private ‘co-founder,’ but publicity is a completely different ball game. Your management team and board will be exposed to increased public opinion and scrutiny. This can influence the success of your IPO and the appreciation of your company in Twitter age.
Before considering an IPO, it is relevant to set up a world-class team in your C-suite and even in your company.
Do you have experience with the C-suite with public companies? What is your executive team’s business record? How’s the criminal record? Before you consider publication, these questions must be answered positively.
The former President of NYSE Thomas Farey also proposes that private firms create an investment relations team (IR) before contemplating an IPO and increase accounting and finance staff. Your team has a highly important role to play in making or marking your IPO.
What are your investments predictable?
Your ability to reliably forecast your financial results and to achieve your financial goals over a long period of time however imprints your company with an index that is required for an IPO; predictability.
Investors need limited risk before investing, so an IPO needs to disclose the financial records extensively. If an IPO is to thrive, the company must have shown over time that its financial growth can be predicted. As a private corporation, therefore, one priority is to improve accurate budgeting and forecasting functions.
An IPO depends on your business’s space to continue to expand and the size of your market. Investors expect their securities to increase in value and not just slowly. Precise forecasts demonstrate that you are in line with your business facts.
The willingness to reach or to surpass the standards of growth gives the business a very healthy enthusiasm for the market.
If your private business does very well, you do not even need an IPO. Prestige is available at a discount. However, if you want to make fair expansions, invest in research and development or grow your markets, an IPO can be an excellent option but only if it works.
You can grow up in public or reveal yourself, and everything depends on the private work you have done prior to publication.
Also Read: Important Financial lessons