Planning for an IPO - Part 1: The Decision to Float
David Wilkinson helps entrepreneurs grow their companies and manage the issues and opportunities that come from rapidly scaling up their businesses, whether private, private equity backed, or listed on the public markets.
David is a Chairman, Non Executive Director, board advisor and mentor for fast growth entrepreneurial businesses.
He brings deep financial experience, gained from being closely involved with scaleup businesses at crucial inflection points in their growth trajectory, as well as from a long career with EY and headed up the UK firm’s services to fast-growth, entrepreneurial businesses and IPO services. He founded and ran the UK Entrepreneur of the Year awards programme at the firm.
He also helps mentor CEOs, acts as a bridge between management and shareholders and has helped CEOs consider and manage succession planning.
Of the variety of exit strategies available to businesses, the ‘going public’ or IPO (initial public offering) route is not one to be taken lightly.
In this three-part thought leadership series, David explores with us the process of going public, which if not expertly managed can present challenges to the momentum of the business.
In the first part of this series, we explore the drivers behind the decision to float and also navigate what investors are looking for in an investment proposition.
Globally the market for IPOs seems insatiable. According to the Economist, “In a world of near-zero interest rates, it appears investors will bankroll just about anyone with a shot at outliving COVID-19… Startups, for their part hope to cash in on rich valuations lest stock markets lose their frothiness and will use IPO proceeds to blitzscale their way to profitability. The pandemic has made business models that might not have matured for years, such as digital health, suddenly viable.”
In the UK, the same combination of low interest rates, an abundance of liquidity, and sophisticated IPO candidates has spurred growth. In fact January 2021 was the busiest January for the City since 2006. It raised $2.2 billion from four listings, according to a report in CityAM.
The Economist continues, “Venture capitalists still plough three times as much into American startup stars as public investors do. But proceeds from listings are now growing faster than private funding rounds. And the boom is global in nature.” Stripe, for example, raised $600 million in March 2021, giving the ten year old company a $95 billion valuation.
We have considered three perspectives on this fundamental question – business, personal, marketplace.
Floating can supercharge a business. It supplies funds which can be put towards future growth, it provides a means to acquire other businesses that can accelerate growth, and it can help attract and keep the best possible workforce.
For the owners of the business an IPO can be a liquidity event (albeit often subject to restrictions) and a huge mark of achievement. To have taken a business through all its early phases to this day brings status and allows for financial rewards, justly deserved.
In the broader market, an IPO can be a fast track to greater visibility and greater credibility with customers, vendors and other stakeholders.
While the IPO is a public mark of success, it’s not without downside. It is a time-consuming, hugely distracting and expensive process.
Being in the public eye can be onerous as markets demand accountability and reporting, and often take a short term view of the business’s success. Scrutiny of the company’s CEO and management team comes from various angles, including the independent members of the board, who monitor and can have the power to remove underperforming executives.
The IPO process can expose sensitive commercial information to competitors and subject the company to bureaucratic scrutiny from regulators across multiple jurisdictions.
In terms of payback for the business owner, although shares can be sold at IPO, it is likely that the subsequent sale of shares will be restricted for a period of 2-3 years, after which any sales would have to be carefully managed to avoid damaging the market.
What are investors looking for?
Planning for an IPO is the key to a successful outcome, and a fundamental component of such planning is understanding the motivations and requirements of your anticipated investors. While there are many types of investors, from pension funds to family offices to sovereign funds, VCs and private equity funds, there are consistencies in what they are looking for in an investment proposition.
The IPO candidate must have a clearly articulated proposition, an understandable revenue model and a strong, defensible market position. In a nutshell, investors are looking for a ‘story’ – online greeting cards company Moonpig, women-first dating app Bumble, data warehousing leader Snowflake, or iconic bootmaker Dr. Martens, for example.
A prospective IPO candidate should demonstrate its future prospects, hopefully based on historical evidence, a path to sustainable profitability, and a large addressable market. Investors are looking for defensible ‘moats’ – barriers to entry such as scale, patents, and proprietary models, as well as addressable market size.
Investors want to see a strong business track record, individually and collectively. They look for a high quality, experienced team with no obvious gaps. A recent survey of institutional investors by PWC showed the weight they put on management capabilities:
“When asked what’s important in roadshow meetings, they said: Management’s confidence and conviction (96%), experience and credibility (93%), as well as their facility with the numbers (91%).”
In the same PWC survey, investors looked for seasoned, credible board members with at least 20 years of executive experience. Potential investors also want to know that the company’s business systems and internal accounting processes can support the rigours of being publicly owned. They need to be able to report the news, but, importantly, also be able to identify changes in the business that could affect its future prospects.
Non executive board members are a necessity for a newly floating company; generally one more than the executive members of the board. But, as David Wilkinson points out, you should not view them just as a cost: “ Look for non-executive directors who can add value to your business. This may be because of their previous experience as a listed company director, or through their industry knowledge and contacts, or just because they come at issues and opportunities from a different angle to the management team”
Generally, non-executives join just prior to an IPO, as a prerequisite for a successful float, but many teams want someone to join the board early, to help them prepare.
With all this considered, there are other options for businesses to evaluate before finalising their exit strategy. The second part in this three-part thought leadership series with David, explores some of the alternative strategies to ‘going public for businesses to consider, while the third part of the series goes into the detail of the IPO planning process which needs to be expertly managed to avoid a business losing momentum at such a critical time.
More about David Wilkinson
Invigorate Advisor, David Wilkinson currently chairs two private companies, one a fintech SaaS and the other an international property company that he took private from AIM.
He is NED designate for two technology companies currently preparing for IPO on AIM in 2021. He was the Senior Independent Director, including Chair of Audit, Remuneration and Nomination Committees, for a recently sold AIM-listed digital marketing business. David is also a NED for an early stage medical technology business and was a trustee and Chair of the Finance Committee for a national charity.
Previously David was a senior partner at E&Y and headed up the UK firm’s services to fast-growth, entrepreneurial businesses and IPO services. He founded and ran the UK Entrepreneur of the Year awards programme at the firm.