Laura Mott, partner and IPO specialist at haysmacintyre, explains why going public is all about timing.
Last year the IPO market experienced a dry spell – the lowest since 2009. However, this slump rejuvenated in the first half of 2017 and the market has maintained momentum since.
Uber recently made public plans to list in the next 18 to 36 months, showing that for the tech industry IPOs are big business.
Many entrepreneurs dream of floating big one day, but as ever, timing is everything. For example, Airbnb recently delayed their IPO plans having raised $1bn from VCs.
Timing is particularly important now as a number of key events, including the Brexit vote, the results of the US election and wider global uncertainty have all contributed towards stock market volatility. The market is shifting, so when is the right time for tech companies to start an IPO?
Things to consider
Whilst there may not be a specific ‘right time’ to float, there are a number of factors that tech companies should be aware of. During a period of uncertainty – as experienced in 2016 – it may be best to re-evaluate the timing of an IPO.
Understanding the level of investor appetite for tech businesses is key, and knowing how well other newly public companies have been received by the market gives a good idea of how other tech businesses could fair.
Wider market activity is important for timing, but not the be all and end all. Having a clear IPO strategy in place is vital to ensure the ability to move quickly once there is a peak in investor appetite.
There are lessons to be learnt from Snap’s listing on the New York Stock Exchange back in March, which offered shares to the public with no voting rights.
With the founders retaining authority, the controlling shareholders are able to pursue their “entrepreneur’s vision” without facing any opposition from others. But this approach has been criticised and with the share price still below the IPO price, it is likely to be put under further pressure as investors continue cash in. The strategy calls into question the founder’s choice of timing and the issuing of none voting shares: will the gamble pay off?
Typically a company looking to make an IPO will either be mature, with steady revenue streams, or will have the potential to be high growth.
They may be larger at the date of listing, and a more mature growth business than those that may have looked to list previously, as Airbnb is on course to be.
High growth tech companies in particular should be able to demonstrate sustainable growth through their business plans, a pathway to profitability and a management team that investors can buy into.
Not a vanity project
Management teams need to consider the reasons for completing an IPO carefully. Many companies look at an IPO as an expansion project or as a means for the original founders to exit the business. However, it should never be seen as a vanity project.
The process itself can be costly, so plans to float should always be aligned with the company’s strategic goals. Often IPO’s can distract management from the day to day running of the business, so having experienced, supportive and strong advisers in place from the offset is important. This will help ensure the company is at the right stage, and picking the best time, to float.
It is not unusual for tech companies to be loss making or just breaking even at the time of the IPO, but it is imperative to understand that investors will consider whether the company’s forecasts and strategic plans are achievable. Investors need to be assured that there is a long term profit potential; they are not purely focused on the present but will look to buy for the future. Leaders of tech companies therefore need to make sure their projections are attractive, before embarking on the IPO process.
Another key consideration for CEOs or founders is the additional demands and scrutiny that life as a public company can bring. It is fundamental that there is sufficient resource and time commitment, both during and post IPO, in order to make the transition to a public company a smooth process. Preparation, planning and building a solid and experienced adviser network are the three key links in the initial stages to be on the road to a successful IPO.
Each IPO is different. Whilst growth prospects, the strength of the management team, investor sentiment and internal resource are key, it is unlikely that all of these will be aligned during the initial stages of the IPO. Getting the timing right is crucial and those operating alongside an experienced adviser network are well positioned to ensure theirs is a success.