The initial public offering market in the United States has seen a lot of activity this year, but it hasn’t all been good news. While we’ve had several big-name brands go live, including Lyft, Pinterest, and Uber. Some have stumbled notably as they stepped out onto the proverbial IPO landscape
The IPO Landscape Seems Daunting
These cases garnered significant negative attention from the media. And, it has prompted a number of high-profile Silicon Valley investors to gather to rethink the IPO process. With the spotlight on IPOs — and not always for success stories — it’s no wonder that many business owners are becoming hesitant to go public. There’s significant potential for things to go wrong even if your company is a global brand with a massive client base. Despite the challenges that exist in and around an IPO, the process doesn’t have to be daunting.
Going public can provide your company with the most efficient access to funding that can be put toward acquisitions and fuel growth. It offers an opportunity to attract and retain top talent by giving employees share options. To access these benefits, you need to make sure you’re well-prepared.
A Strategy For Going Public
The first step on the path to IPO is understanding the challenges you’re likely to face. By mitigating these early on, your pre-IPO company will be better-positioned to overcome the biggest hurdles of going public.
The truth is that all pre-IPO companies face the risk of devaluation. It’s part of the process as they transition from illiquid private markets to liquid public markets that trade on a daily basis. This stems primarily from private investors’ high expectations. These expectations are based on the growth trajectory a company has experienced leading up to the IPO and then shattered when they face the realities of public market investors.
Managing Expectations
When companies fail to track on the projections outlined to the public, they’re likely to foster negative sentiment that impacts their performance in the public markets. If your company is considering an IPO, it’s important to clearly state projected growth. From there, it’s about managing expectations around its variability.
There’s no such thing as over-communication when it comes to managing shareholder expectations. Tell your story as transparently and broadly as possible ahead of your IPO, tailoring your marketing and PR strategies by audience and medium. This will be critical in keeping your investors’ expectations aligned with where you see your company going.
Stakeholders Matter
Next, consider your current stakeholders, including venture capitalists and employees. They may see the IPO as a liquidity event for their investment. After all, the hold time from a first venture capital check to IPO falls between seven and 10 years, so it’s likely that they may be ready to cash out.
Your company needs to plan for this and ensure that there are buyers in the after-market ready to step in once you list on an exchange. Otherwise, previous investors may all pull out at once, and a sell-off of this scale can massively drive down value.
Finally, it’s vital that you ensure there’s enough money on your company’s balance sheet to achieve your stated objectives. If your company is not profitable, investors will quickly lose confidence and sell their position. Low profitability is a red flag to investors no matter how much a company might say it’s growing.
How to Build a Success Story
There can be a number of challenges when it comes to IPOs, but with the right strategies, you can dodge them and enter the public markets in one piece.
In stark contrast to 2019’s famed IPO missteps are Zoom and Beyond Meat, which are both among the most successful IPOs of the year to date. Zoom saw its shares more than double just a few weeks after going public in April 2019. Meanwhile, thanks to the success of its plant-based meat substitute, Beyond Meat’s stock price surged as much as 734% in the first three months after its IPO.
When done right, going public can put your company on the fast track to long-term success. As you prepare to start this journey, consider these three strategies that can help you mitigate risks and protect your company’s valuation.
1. List earlier in your company lifecycle.
Giving a broader pool of investors the chance to get in early will likely encourage them to participate in future rounds of funding. Listing early also gives you a chance to make long-term investors out of your employees by offering them employee shares. Most importantly, listing early is an opportunity to build a foundation of supportive shareholders. List with a stock exchange platform that allows for shareholders to rotate in and out over time rather than having one mass liquidity event.
Alternatively, look at companies like EquityZen. They specialize in helping companies manage their existing shareholders before they go public. Research the alternative options you have in your industry. You’re likely to find something new.
2. Communicate a long-term strategy.
Use quantitative milestones to track company performance, and communicate these benchmarks and your long-term vision to investors as you transition toward your IPO. Investors will value the transparency.
Plus, they will be more comfortable putting their money behind a company that they feel they know and understand. Communicating often and effectively will also improve your chances of creating demand for your stock when you list.
3. Prepare an after-market plan.
Line up experts — dealers, newsletter writers, and other platforms — to help bring visibility to your newly listed company. This is part of the crucial role investment banks are meant to play in go-public events.
They are there to help script the story and position the company, build a database of investors, determine pricing tension, and then provide after-market support through roadshows and strategic advice. This role is even more important to earlier-stage ventures that are selling the vision of their future value.
You’ll also want to work with an investor relations firm to help you communicate openly with investors, disclose financial information, and control risk. This ultimately decreases the pressure on valuation by eliminating uncertainty and establishing the true value of your company. All of your marketing and public relations tactics — including any leadership or compliance approvals — need to be ready for launch months ahead of your IPO.
Going public should not be intimidating. If your company is adequately prepared, a public listing can help attract funding, talent, and acquisition opportunities. By taking the appropriate measures in advance, you’re much less likely to wake up to a devaluation nightmare the day after your IPO.
