IPO markets experience peaks and valleys in terms of the number of IPOs and capital raised in a year, the sectors finding favor with investors and the returns post IPO. Macroeconomic conditions act as either headwinds or accelerants, but great companies often can go public in almost any market. Ultimate success will be different for each company, but certain elements of a successful IPO are common across most IPOs. And the path to success is built upon preparation that is defined most of the time by quarters and years as opposed to weeks and months.
Here are some of the ways to measure the success of an IPO.
- Capital raised: Simply defined, success means pricing an IPO inside the price range on the S-1 prospectus—allowing management to move ahead with their near term growth plans. The median deal size for IPOs over the five-year period ending on 2021 was $218 million, according to Dealogic, and many companies raised IPO proceeds well in excess of that amount. In fact, during the bull market of 2021 when valuations were particularly strong, 26 companies raised over $1 billion at IPO (excluding SPACs). Of course, large IPOs aren’t the only game in town and more than 30 pharmaceutical and life science companies raised less than $100 million in 2021, most of them in the biotech sector. Nearly every company going public targets a capital raise that will meet its cash needs for the next 18-24 months—and ideally when the company often projects it will be profitable. And going public allows the company to restructure its balance sheet to include other sources of capital, hopefully lowering the total corporate cost of capital.
- Valuation: Management and its pre-IPO investors must also consider the realistic valuation of the company at IPO. You may be loath to sell a piece of your company at a discount, and growing companies with a clear path to profitability are often able to drive “oversubscribed” books of demand from IPO investors. But when the IPO market is less robust, even the highest quality companies may be required to consider a valuation that is compelling to investors. Still, you may be able to limit that relative discount as compared to where competitors trade in the public markets (as measured by Enterprise Value to Revenue, Enterprise Value to EBITDA or Price to Earnings).
- Share price appreciation: A common indicator of success is the appreciation in share price from the IPO to the current trading price. The new investors and management focus on the returns from the IPO price to the current trading price. The foundation of this price appreciation is management’s ability to execute on its plan, project financial results on a quarterly and annual basis, and ultimately exceed them.
- Talent: Going public creates awareness, and that can help you attract top talent as well as retain high performing employees. Well constructed compensation plans provide for employee liquidity, diversification and retention.
- Branding: Many customers of B2C and B2B companies benefit from the branding around an IPO. An IPO underlines a company’s stability and long-term growth prospects given the transparency of its financials and a publicly traded stock.
Hallmarks of attractive private companies
The US IPO market is focused on growth and it’s tolerant of companies with little to no profitability at IPO. For the last five years, that has meant the leading sectors for IPOs have been technology (mostly software) and pharma life sciences (mostly biotech). But many companies outside these two sectors, especially in the consumer, financial, and real estate sectors, also turn to the IPO market for growth capital. Here are some characteristics common among high-profile private companies executing successful IPOs:
- A large, growing TAM or total addressable market.
- A differentiated business model and track record of success.
- An attractive product or service, preferably with a competitive “moat.”
- Strong revenue growth that is sustainable and visible.
- Strong margins, cash flow generation and a path to profitability.
- An experienced, “public company ready” management team.
- Robust financial, operational and compliance controls supporting KPI reporting.
- Robust IPO project management.
Preparation is the secret to success
Planning, executing and managing an IPO is a complex task for any organization. The better prepared a company is, the more efficient and less costly the process can be. While the planning process for an IPO can start the day a company is incorporated or as late as months before a public offering, we recommend that an orderly plan be executed over an 12-18 month period. This window gives a private company time to build the capabilities to think, act and perform as a public company.
The preparation process may be even longer depending on the maturity of a company’s existing processes. It is vital that the company understands and addresses any gaps in its capabilities.
Three stages of IPO preparation
In our experience, a successful IPO has three equally important elements.
- A thorough IPO readiness assessment in which big picture issues are identified and realistic timetables are established. This needs to be based on the offering objectives, the company’s specific business issues, the time needed to prepare registration information and the time required to prepare for operating as a public company.
- A working group dedicated to the immediate process of going public.
- Another working group focused on the tasks needed to prepare the business for being public.
Note: IPOs with deal values of less than $25 million, best efforts offerings, oil and gas royalty trusts, business development companies, pricing on OTC Bulletin Board and OTC Pink Sheets are excluded from this narrative.
