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Initial Public Offerings (IPOs) are one of the most significant landmarks in a company’s development. Yet, it’s not all roses. Tech Crunch notes that Mark Zuckerberg was cautious about Facebook’s IPO and didn’t want to jump into it too soon. For many entrepreneurs, going IPO means holding the company to a higher standard of operation. Shareholders will require regular reports on the company’s progress and its vision. Every single statement it makes or mistake that happens will draw scrutiny from the public. However, by going public, a business also accesses the funds of thousands of public shareholders. If the brand is strong, it will even appreciate its IPO price, making it a strong contender on the market.
Going IPO doesn’t happen overnight, however. Planning and strategy go into crafting the best possible IPO situation for a company. When should a business consider going IPO? Not a moment before it’s ready. No matter how big a business is, entering the realm of a publicly traded entity before it’s prepared can have disastrous consequences. How do you know if your business is ready for going IPO? It starts by understanding the public investor. These are the major categories that public investors are interested in when they’re looking for IPO companies to invest in.
Investors won’t put their money in a company they don’t believe in. Whether they’re using fundamental analysis or just seat-of-the-pants determination, they can usually spot a dud because of its rate of revenue growth history. McKinsey mentions that companies that demonstrate top-line growth see double the valuation that those focusing on margin gains make. A considerable growth rate offers three potential pieces of information to the IPO investor:
- The brand is securing new customers, hence the growth in revenue coming from sales to those clients.
- Existing customers are spending more on the brand, increasing the investor confidence in the brand’s ability to generate customer loyalty.
- There is lower churn among existing customers compared to new customer acquisitions.
Each of these bodes well for a business intending to go IPO. If a company wants to demonstrate a robust growth paradigm, it needs to have consistently high numbers for its growth rate for the first two years post-IPO. Tech leaders usually manage around 30 percent revenue growth for each year after their IPO. This information suggests to the public investor that the company has an edge on the competition in a significant area.
Related: Krispy Kreme Files $100 Million IPO
The single worst time for a business to want to go IPO is when it’s in dire need of money. Yet, the irony is that companies usually choose to go IPO at the time when they need that money for capital expansion. Public investors like knowing the business they’re putting money into won’t become insolvent under their feet. The business financials filed pre-IPO should tell the investor that the company has enough cash to break even (or soon will), even if the IPO doesn’t come to fruition. If a business delivers financials showing a shortfall that the IPO will make up, investors are less excited about putting their money into the company. IPOs must be well-timed to take full advantage of the capitalization table. The last thing a business needs is to go back to the capital markets once it’s already gone IPO.
Probably the most significant factor affecting public investor confidence in a company is its profitability. Most businesses have a built-in method of generating profit, but they usually don’t do so when they first start operating. Many startups, for example, begin in the red. When their business model matures, they start generating profits and develop free cash flow for the enterprise. There are several routes a business may take to profitability, including EBITDA or net income. Regardless of which method the company chooses to demonstrate the profitability, it needs to convince the public investor of this reality. Most public investors are looking for a clear path to near-term profitability. They want the business to show them how it’ll be profitable in the short term. Each business’s path to profitability is different. Industries or inherent risk within a market may impact the company’s period to near-term profitability. Companies may be able to make a case for a more extended period before profitability by leveraging these factors logically.
What companies is the brand competing against? How strong is its competitive advantage? Investors want to pick winners; that’s how they make their money. If an industry is crowded with companies doing the same thing, it suggests that this field has a low barrier to entry. Public investors don’t buy into companies that enter into highly competitive fields. To make the company more attractive to its investors, it needs to establish its uniqueness. Much like selling to a customer, the business must break down its advantages in plain language for the investors. Showing how the business acquires new customers and demonstrating that it can do so consistently might help the business’s case.
Products and services
An investor looks at the brand through its product offerings. However, when it comes to an IPO, having too much can be confusing for the public investor. If we examine the FANG (Facebook, Amazon, Netflix, Google) companies, we can see that their IPOs were based on a single good or service. Once they establish a foothold, they start adding on to their products and services, demonstrating their versatility. Enterprise software companies refer to this as the “land and expand” model. These companies offer their IPO based on their most important service in the most isolated market, then slowly start entering new markets with their services as they grow. For the investor, this is an excellent way to get in on the ground floor. Even investors who aren’t keen on a business initially might take notice after it starts expanding its service offerings.
Getting ready for launch
Just because a company has everything going for it doesn’t mean it’ll have a successful IPO. Many things could crowd out a business’s message and force it to get lost in the clutter. The predictions about the bull market continuing are genuine, meaning new IPO companies may benefit. The market isn’t the only thing a company needs to concern itself with, however.
Investors can be quite thorough in their research of a company. Not only is the business itself under scrutiny, but so are the CEO and members of the board. For example, missing rent a single month may reflect poorly on a CEO’s ability to manage a large company. This poor personal-finance decision, in turn, will impact how the public investor sees the company’s long-term profitability with that person at their head.
There’s no way to mitigate every eventuality, but being prepared helps the business. If the business wants to deliver on its IPO, it needs to use it as a promise to its investors and its customers. If it doesn’t, it might find going IPO more of a hassle than a benefit.