Jack Clipsham, a corporate finance partner at Kreston Reeves, on what technology entrepreneurs should bear in mind when taking their business public.
Many entrepreneurs will harbour the dream of floating a business on the London Stock Exchange or other capital markets, making its owners and investors wealthy. But it is a time consuming and costly process, with long-lasting ramifications.
Take, for example, the requirement for disclosure and communication with investors and the City. Bad news and mistakes can be unfairly amplified and have both an immediate effect on the share price and longer term impact on the market’s perception of the management of the company.
Businesses wishing to float, often referred to as an Initial Public Offering or IPO, should consider the following.
Resource and skills
An IPO is potentially a lengthy and time consuming process. Don’t let the business suffer by allowing senior and operational management to be distracted from the day-to-day running of the business. The last thing you need is a downturn in the business just as you’re trying to attract investors.
Consider creating a dedicated IPO team, perhaps led by a non-exec director or consultant, all with experience of the IPO process.
Increased VC investment generates growth in flexible working
Your advisory team will include a Nominated Advisor as the lead adviser, broker, lawyer, reporting accountant and financial PR company. Choose them carefully ensuring they have a good track record in supporting companies through the IPO process.
The IPO process is expensive, costing as a rule of thumb 10% of funds raised. Some costs will need to be settled before funds are raised, and there is always the possibility of the IPO collapsing which will still incur costs. Ensure the business has the funds available before starting the IPO process.
Agree a clear timetable with the Nomad and ensure all key advisers have bought into it. Add to that timetable internal milestones that need to be achieved. Of course there will be factors beyond your or your advisers’ control, but without something to work to the timetable will drift potentially adding extra costs.
Cash to be raised
Be clear about how much you want to raise at IPO and how it will be used. Raising too much unnecessarily dilutes current shareholders and may put off investors. Attempting to raise too little can call into question the financial viability of the business in the 12 to 18 months following the IPO, which could result in investors declining to participate.
Modulr Finance, iwoca, Currencycloud and Atom Bank awarded Banking Competition Remedies fund
Investors will be reluctant to see anything more than a small proportion of the IPO proceeds, if any, going to existing shareholders. Any desire to “take money off the table” must be discussed early on with your Nomad.
And a final word of warning to business owners: if looking to fully exit the business, an IPO is not an appropriate option.
Jack Clipsham is corporate finance partner at Kreston Reeves. Contact Jack Clipsham here.