A company usually begins to think about going public when the funding required to meet the demands of business expansion begin to exceed its ability to raise additional private/venture capital funding or debt capacity. But simply needing capital does not always mean that going public is the right, or even possible, answer. Your company must also be perceived as an attractive investment candidate.
How can you determine if your company is a public offering candidate? Your answers to the following questions can help.
The most important question a CEO should ask is, "Why do I want to go public?" Some of these reasons are:
To raise money for expansion of operations
To increase market value
To acquire other companies
To attract and retain employees
To provide liquidity for shareholders
To enhance the company's reputation
Other reasons may be private and personal. It is truly important to recognize your reasons and to keep your goals in mind throughout the going-public process.
Generally, a company that outpaces the industry average in growth will have a better chance of attracting prospective investors than one with marginal or inconsistent growth. Some underwriters consider a company to be an IPO candidate if it has annual revenues of at least $20 million and profitability of $1 million or more. Even so, many early-stage technology companies also have successfully gone public. The Internet has created an opportunity for many of these early stage technology companies to exponentially grow their business in a very short time as compared with more "traditional" companies. Though they may not currently exhibit a strong growth rate, investors perceive these companies as having enormous potential for growth because of the other favorable characteristics they possess (e.g., product or service that is highly visible, unique or of interest to the public, and capable and committed management).
Many early-stage companies that do not have a proven track record increase credibility and can validate their business concept, product or service before they go public by selling a portion of their equity to Venture Capitalists. Investment from venture capital sources is viewed as "smart money" which can also help increase valuation leading up to an IPO.
Many companies that have successfully gone public have shown market support for their product or service that would sustain an increasing annual growth rate for a five-year period. This growth potential should be even larger if institutional investors are expected to buy significant blocks of shares in the company. Again, the exception might be the early-stage technology company that has developed to the point that the risks usually associated with a venture capital investment-product development, manufacturing capability, market acceptance, and market size-have been reduced.
The established company can answer this question with historical sales data, while the early-stage company must use market research projections and demonstrated product superiority. In fact, the early-stage company usually qualifies as an IPO candidate because of the uniqueness of its product or service.
In any public offering, the quality of the management team is a key factor. To have credibility with the investing public, the organization must have experienced leadership that functions well as a team. In addition, ownership by management demonstrates to investors that it has a vested interest in the company's future. In order to have a successful IPO, management must be committed to the time and effort involved in meeting registration requirements, conducting analysts' meetings, and providing financial reports required for both the SEC and shareholders on a timely basis. It must also be prepared to upgrade the company's system of management controls and financial reporting to ensure compliance with full disclosure requirements and shorter financial reporting deadlines, both of which are necessary to maintain credibility and investor confidence after the IPO.
Selling equity represents a permanent forfeiture of a portion of the returns associated with corporate growth. Also, raising equity capital in the public markets can entail substantial costs, such as the underwriting discount plus other fees and expenses. (See the discussion on costs that appears later in this section.) However, the answer to whether the benefits outweigh the cost cannot be realistically known until several years after an IPO.
The demand for initial public offerings can vary dramatically, depending on overall market strength, the market's opinion of IPOs, industry economic conditions, technological changes, and many other factors. When a bull market is booming, the market window for new corporate offerings tends to open and these new offerings enjoy bursts of popularity. In a declining market, however, the market window tends to close and IPO activity slows down and may even come to a dead stop. Although no one can accurately forecast the market's mood, you must consider the importance of timing and be prepared to alter your company's timetable. The usual time, from the initial meeting of all of the team members until completion of an offering, can take three (under the best circumstances) to five months.
Hot markets accept many offerings, but you do not want to be the deal that is just one day too late. Recognizing the urgency of the registration process is critical. Even in a slower market environment, there is what is referred to as an "industry pop" or "industry flurry." Recent occurrences of this phenomenon have involved Internet companies. "Industry pops" are tricky since you may be perceived as a "me too" company and not as strong as the leader and when interest wanes, the window of opportunity closes quickly. However, "industry pops" give the public investor good current information on comparable companies in order to make valid pricing decisions.
Market conditions will also impact the valuation of your company and the eventual pricing of its stock.
The current bull market, fueled by the swell of investments in mutual funds by institutions and individuals, has provided a strong environment for IPOs. Data from the SEC shows the following annual figures for the number of IPOs, the gross proceeds raised, and the average size of the offerings:
Why am I going public?
