The primary reason for a company’s initial public offering (IPO) is to raise funds. When a private firm decides to raise equity capital by offering its stocks for sale to the public for the first time, it is known as a “going public”, and the whole process of offering shares is called an “initial public offer”.
But getting through the IPO period can be challenging. But how can you get there, and what should you do to prepare for the journey? It isn’t information you’d typically come across in the course of business, and it probably doesn’t seem important in the hectic early days of a startup.
This guide will list five things founders need to understand before issuing an IPO.
Things founders need to know before issuing an IPO
What is an Initial Public Offering (IPO)?
Founders must first understand the concept of an IPO. Issuing shares of a private organisation to the public in a new stock issuance is known as an initial public offering. A company can raise capital from the general public through an IPO.
An IPO is a technique of raising funds for major corporations in which the company offers its shares to the public for the first time. The company’s shares are traded on a stock exchange after the IPO.
An IPO is divided into two sections. The first is the pre-marketing phase of the offering, and the second is the first public offering. When a firm wants to issue an IPO, it will solicit private bids from underwriters or make a public declaration to attract interest.
The company then chooses the underwriters to lead the IPO process. When a firm ‘goes public,’ previously held private shares are converted to public shares, and the value of those shares becomes the market price.
The right time to issue an IPO
Founders can consider an IPO as early as the first day, and it may even be their primary purpose. But that’s not the same as being ‘prepared’ for an IPO. Although the company’s founders and management may be up to the task and eager to go public, the company as a whole needs to be prepared and ready on a more granular level.
When it comes to finalising whether or not to pursue an IPO, there are a lot of aspects to consider. Some of which include:
- Is the company scalable and resilient?
- Do teams (legal and financial) have the competence and skill to perform the tasks that a public company requires?
- Is the market in good condition right now?
To get to the point where issuing shares is viable, the company must have experienced significant growth.
Growth and profitability
Public investors will be on the lookout for expansion. Investors aren’t seeking safe places for their money; plenty of savings accounts and government bonds are available for that purpose.
A company’s potential for expansion is a predictor of its future success. Each investor will have a different interpretation of what it means to understand growth. After completing their research, they may examine revenue growth or other measures, such as subscriber or booking growth.
Regardless of how an investor looks for value in a stock, they must be able to perceive future growth potential, or they might invest in any other asset or stock. A business pursuing an IPO should incorporate growth into its business plan to convince the public.
Similarly, profitability is another aspect of the firm that needs to be addressed much more seriously after the IPO. You can evaluate a startup before going public based on the potential market opportunity and the promise of future earnings. On the other hand, firms are expected to earn profits and plan to increase them as they develop.
Check your market
It may seem self-evident, but entrepreneurs must be aware that there is a market capable of supporting their company once an IPO has been accomplished. There is no such thing as the ideal time to go public. There is no rule that states businesses should go public after generating £50 million in revenue. It all depends on the specific company and the sector and region in which it works.
The availability of a market opportunity that can maintain the growth expected over the next 2 to 5 years is critical to becoming IPO-ready. Businesses may be more dynamic and reallocate resources more easily before going public, so it’s far better to think about market circumstances before an IPO than later when options are more restricted.
Finding out that market options are restricted isn’t the end of the world; You can take some steps to diversify the offering and appeal to a broader audience. You can also look at other nations’ markets or pivot the business model to areas with higher profits and growth. During an IPO, the existing business model is offered to the public market, and you must convince potential shareholders of its long-term sustainability.
Reduce and remove singular risks
By singular risk, we mean something hidden that has the potential to threaten a business. It could be due to a significant contract with a customer or an excessive reliance on a single supplier.
When a company matures and considers going public, it should have a specific level of risk diversification across the board. It isn’t simply good practice, but it’ll become a market expectation, and failing to consider it will be incorporated into the IPO share price, resulting in a negative impact.
Founders should concentrate on avoiding specific threats to avoid falling into a big mistake. It may not always be viable, especially during rapid growth, but founders should be aware of these risks and plan to transition to a lower-risk environment.
Investors consider public corporations’ size, scale, financial projections, and growth prospects. If you are dependent on a few suppliers, all of these indicators are under threat as you are not diversifying your risk. All founders seeking an IPO should be concerned about avoiding them.
Why do corporations issue IPOs?
Cost-efficient way of raising capital
A company’s choices for generating capital are limited to venture capital funding, loans, and the issuance of shares.
Most businesses struggle to raise equity funding from venture capitalists because potential investors may not offer the business a fair market value. Similarly, if the company has assets, bank loans are an apparent alternative, but the interest rates might be detrimental to the company’s finances.
In such instances, it is wise to seek equity investment from the public, who might value the company based on its perception, thus being a more cost-effective way of raising capital.
Boosts brand image
A corporation promotes and advertises its initial public offering (IPO) while being launched. Investors begin researching the company’s business, goods, services, financials, and other aspects.
It not only improves market presence but also improves brand image. The firm can also use this buzz to help it grow. Furthermore, financial institutions are more inclined to lend to listed companies than privately-held enterprises.
Visibility and credibility
When a corporation goes public, it carves out a position in the media and reaches out to the general public. This image branding for the corporation will be used as leverage in a future transaction.
Furthermore, because a public company must report its financials, the positive outcomes in the financial statements will enhance its reputation. As a result, a public offering provides a company with market exposure.
Enhances liquidity and profitability
Another significant advantage of going public is the potential for additional cash and liquid assets.
It provides a market for existing shareholders to profit from the opportunity by selling their holdings, increasing the total liquidity of the shares and resulting in high volume trading. It also increases shareholders’ wealth by allowing publicly traded stocks to be used as market collateral for loans.
Diversification and mergers
Companies use IPO money to support mergers. A successful IPO establishes a company’s credibility, which opens the door to unions. Companies also use the funds from an IPO to invest in comparable firms, increasing the success of their primary or core business.
Going public can help private enterprises realise their full potential in the future. Because the stock market is influenced by investor emotion, companies with solid foundations can reap plenty of benefits by becoming public. The Founder should consider their reasons for seeking an IPO as early as possible.
If this is the company’s direction, the business model can be adjusted to make the process go more smoothly. The IPO process will run more smoothly if this is completed sooner. Internal processes and reporting cycles can be set ahead of time if the founders can run the firm as if it’s going public before the IPO in London.