Startup IPOs, IPO stages, Pre IPO Valuation – When is the right time?

What is an IPO?

Initial public offering is the process by which a private company can go public by sale of its stocks to general public, usually after venture capital rounds. It could be a new, young company or an old company which decides to be listed on an exchange and hence goes public. Companies can raise equity capital with the help of an IPO by issuing new shares to the public or the existing shareholders can sell their shares to the public without raising any fresh capital.

When is the good time to have an  IPO?

A Strong business case for raising an IPO

One of the most obvious reasons for getting an IPO is to gain access to the capital market and raise additional capital – the end goal of a startup investment process. An IPO is a major company evolution milestone and a symbol of your company being able to satisfy the necessary government standards and and compliances.

A developed network with investors 

Something that makes the process of raising IPO easier and actually enjoyable, is knowing some of the key people in the investment firms. Although you must have already done your homework, let us expedite the networking process by giving you insights into which investors have been backing the tech IPO journey of companies

Forecast financial growth 

Accurate financial projections is a key to efficient business strategy playing a massive role in a company’s growth especially as a public company. Creating an accurate estimate of budget and forecast as your company operates privately is a key step in establishing the consistency and accuracy of financial reporting for gaining credibility with the investors.

If the company is always audit-ready 

Before going public, you would want to get in a position where you constantly close  quarterly financial statements in time. Even the companies that are backed by venture capital and private equity find it challenging to offer regular reports to their sponsors and board. By going through the exercise months in advance, businesses are able to get ready for the public reporting, stress-free.

Process of an  IPO?

Hire the best team 

Selecting the best team of professionals to handle your IPO process is important for the success of your business. Investment Banks  act as a mediator between the companies looking to issue an IPO and the investors – while acting as an underwriter. The banks are involved in a number of processes like document preparation, issuance, marketing, filing, documentation. The company wants a bank that will sell the shares to as many banks, institutional investors, or individuals as possible. It’s the bank’s responsibility to put together the buyers. It selects a group of banks and investors to spread around the IPO’s funding. The initial step in the IPO process is to decide on an investment bank that will guide the issuing company. The bank will also provide the company with a team of underwriters, comprised of lawyers, certified public accountants, public relations experts, and SEC (Securities & Exchange Commission) professionals. The underwriting team’s job is to make sure that the IPO is successfully completed and that the stocks are sold at the appropriate price. In your quest to become a public company and achieve sustained success, you will need to harness the talented executives across your organization. This may include strengthening your management team and augmenting compensation structures to retain and motivate your most vital assets. Similarly, you will need to select a balanced complement of IPO readiness advisors, attorneys, underwriters and other key counselors who can help you efficiently and effectively navigate the IPO transformation process.

Performing the  due diligence

The underwriters, lawyers, and banks work together to conduct an in-depth audit of the company. Their review incluses legal, tax, financial, customer verification, and market research. The intent is to create complete transparency in the company’s operations and presume risks. Underwriting is the process through which an investment bank (the underwriter) acts as a broker between the issuing company and the investing public to help the issuing company sell its initial set of shares.

IPO “Roadshow”

Before several weeks of the IPO, bankers and management team hold a “roadshow” – a series of presentations in which they market the IPO to prospective investors. It is usually when they first announce the offered price range and size of the shares. The intent is to gather interest from the investors for driving up the initial sales price. An IPO roadshow is a traveling sales pitch. The underwriter and issuing company travel to various locations to present their IPO. They market the shares to investors to see what demand, if any, there is. Looking at investor interest, the underwriter can better estimate the number of shares to offer. The road show is a critical event in the IPO process. Ideally, it is not the first time you will be meeting many of these investors. During this whirlwind tour, your company will be addressing key investment audiences, including the underwriters’ sales forces and prospective institutional investors. For 8 to 10 hours per day over 7 or 8 days, management must sell the investment merits of the story and be prepared to address skeptics who will challenge the investment thesis and valuation.

Pre-IPO

Although it may not be difficult for funded tech companies as they have already gone through the stage of marketing when they were raising money for the startup.. They only have to do it at a much wider scale now with investment banks’ help. What you did Before IPO, investment banks popularized it to the private investors for maximizing company’s position in the market. The investors are usually hedge funds or private equity firms willing to buy shares in the company. A couple of aspects are of importance ;

  • Value of issuing company
  • Reputation of issuing company
  • Success/failure of the IPO roadshow
  • The issuing company’s goals (i.e., amount of money to be raised)
  • The condition of the economy.

Prioritize readiness over timing

Many say that timing the market is the key to success for an IPO. We believe that market access is more often driven by investor confidence in the ability of your company’s management team to execute on your business plan and consistently deliver strong investor returns. Yes, market volatility and economic uncertainty can impact the timing, but more often than not, internal factors matter most. Your scale, growth trajectory, maturity and the readiness of your business for public scrutiny will truly drive market acceptance.

Get the right message out into the market

The prospect of courting a new pipeline of public investors and maintaining aftermarket support is challenging, time-consuming and often one of the most underestimated activities in traversing the IPO landscape. Your company’s debut in the public markets requires a strategic investor relations function that communicates with your shareholders and the public and manages regulatory and legal risk, as these are critical issues to consider and address pre-IPO.

Uttal, B. (1986) Inside the deal that made Bill Gates $350,000,000. Fortune (July 21) , 343-361. Welch, I. (1991) An empirical examination of models of contract choice in initial public offerings.

Journal of Financial and Quantitative Analysis 26, 497-518. Welch, I. (1992) Sequential sales, learning, and cascades.

Journal of Finance 47, 695-732. Zeune, Gary D. (1997) Going Public: What the CFO Needs to Know. Forthcoming from the AICPA.

Leave a Comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s