An IPO can provide the fuel that grows a startup into a brand with global reach. But failing to prepare properly can have dire results
Unless a startup is planning to sell stateside, the most effective way to grow a company past a certain level will be to float on the stock exchange and become a public company. But preparing a startup for an IPO isn’t something that can simply be done overnight. “Moving from a private company to a publicly traded company involves a big change in your corporate structure,” says Russ Shaw, founder of Tech London Advocates, the organisation that promotes and champions London’s tech industry.
Given the multitude of changes that a company must go through in its transition from private to public, it’s absolutely vital that an entrepreneur leaves themselves a long enough road to get their business up to scratch. “It’s not just a case of deciding, ‘I’m going to go out and IPO my business,’” Shaw says. “You have to really think long and hard about it.”
One of the reasons a startup needs to set aside sufficient time is to address one of the key concerns involved in preparing for an IPO: securing the right talent. “You need to consider your board structure over a long period of time and make sure you have the right people in position,” says Sam Smith, founder and CEO of finnCap, the independent finance broker. Attracting the right c-suite, non-execs and advisors will help keep a growing business on the road as it begins to gear up for its floatation. “It’s about finding people who can help you get through not just the startup stage but also the scaleup stage,” she says.
Another factor a startup has to consider as it builds towards its IPO is the regulatory responsibilities it will need to stick to. “You need to prep your business to operate in a different way,” Shaw says. For example, when a startup lists on Nasdaq, it will need to comply with the Sarbanes–Oxley Act of 2002. “Both you and your finance team will be required to report things in a certain way,” he says. “You have to make sure you’re ticking the correct boxes from a financial and regulatory point of view.”
But a startup’s obligations don’t end there; it may also need to adjust its financial systems to ensure that it is able to offer accurate reporting of its results. “You’ve got to have some sort of visibility over your revenue,” says Smith. Whilst quarterly reporting is no longer mandatory within the EU, being able to offer accurate, periodic updates to shareholders will be absolutely vital when a startup goes public. This is why a strong finance function and an FD will prove invaluable in preparing for an IPO. “That’s something that is probably underinvested in early on but it will help you get on top of everything because you’ll have that person to think about controls,” adds Smith.
Inevitably, this will involve something of an adjustment for many businesses: startups may have become used to doing their own thing but going public means they are opening themselves up to a much higher level of scrutiny. “If you’re not used to having those sorts of board meetings and you haven’t got a structure in place, it could end up being quite a shock to the system,” Smith says. Putting effective measures and processes in place, such as monthly meetings with clear documentation, can help prepare a business for the expectations of public shareholders. “It doesn’t have to involve a whole lot of time and admin but it’s just about bringing a bit of rigour to the process,” Smith explains.
Whilst all of these factors will lay the groundwork for an effective IPO, entrepreneurs are probably most concerned with how they can make their shares as attractive as possible. Ultimately, if a startup can construct a credible narrative about its place in the market, its point of difference and how it has gained serious traction, it will help make the case for its valuation. “It’s not going to be a long, detailed story but you want to have some key messages out there that say: ‘this is what we’re doing, this is what we’re bringing to the table and this is why it’s going to be a solid IPO’,” Shaw says. “These are all things that investors will look at when thinking about your share price.”
But, of course, having a strong equity story is only half the battle. Building a buzz around your floatation relies on how you communicate that story to the world at large. “Quite often it’s about building up a position,” says Smith. “It’s about how you get the message out there and build up that track record and reputation.”
For this reason, Smith recommends building effective PR into a startup’s floatation strategy from an early stage to gradually boost the company’s rep and ensure its narrative is reaching investors and the wider public. “It makes the IPO much easier because people have heard of you,” she says. “You’ll always be walking in there with a big advantage and they’ll already have a perception of your business.”
However, building up a jaw-dropping valuation can prove to be a double-edged sword. It’s natural that a startup would want to net the highest possible share price but it’s vital a company is still setting realistic targets for its growth. “People want a higher rating and a higher multiple but, if you don’t hit that, share prices drop back down very quickly and it’s very hard to recover from,” Smith says.
This is an easy trap for any startup to fall into, particularly one operating in an exciting and hype-prone sector. “We see this particularly with the high-profile US tech floatations,” says Shaw. “They raise a lot of money but create a lot of expectations.” Perhaps the most obvious recent example is Twitter: despite a huge amount of excitement pre-floatation, the company struggled to meet its targets and, over a four-month period from April to August 2015, saw half of its value wiped out. “If you’re suddenly in a downward spiral, before it gets too late you need to make sure you have a good explanation as to why you’ve under-delivered and figure out how you’re going to turn the corner,” he adds.
Ultimately, there are many stages to planning a successful IPO and it will likely take several years to transition from a private to a public company. Therefore, it’s worth taking the time to really research and plan the route you need to take. “It’s a big commitment: there’s a lot of work involved and there’s a lot of advance preparation,” concludes Shaw. “So if you’re going into this, make sure you’re going into it with your eyes wide open.”