What makes a successful IPO?


Daniel Klausner
Capital Markets Advisory Leader, Deals, PwC US

By many accounts, 2018 was a good year for companies that launched an IPO and for many investors who bought stock in these newly public companies. In our 2018 Annual Capital Markets Watch, we reported that 2018 saw more than 200 offerings for the third time since 2008. In total, 214 IPOs raised $54 billion, indicating strong interest from the investment community in IPOs. In addition, 2018 was the strongest year for these offerings in four years. The first three quarters of the year had strong volumes with 18% of IPOs pricing above their ranges.

But what makes an IPO successful or not? There are definitely many degrees of success. Here are some of the ways to measure the success of an IPO:

  • Capital raised: Although the median deal size for IPOs between 2005-2017 was $120 million many companies raise IPO capital that exceeds that amount. Several of these large IPOs in 2018 include, Elanco Animal Health which raised $1.74 billion and Greensky which raised $1.01 billion. Every company going public has a goal for how much capital it needs to raise with its IPO to achieve it goals. Each company will know if it was successful in meeting its own metrics.
  • Share price appreciation/return: A common indicator of success is the appreciation in share price on both the first day of trading and from the IPO to the current trading price.  The Buyside and IPO companies tend to focus on the so called “offer to current” returns which is the return as measured from the IPO price to the current price (“offer to current”).
  • Valuation: Robust demand for an IPO stock typically results in a higher valuation for the company as IPO investors place indications of interest for the IPO stock which results in an “oversubscribed” book. Rapidly growing companies which are able to create a competitive “moat” around themselves tend to price their IPO at higher valuation multiples vs. their comps.
  • Recruiting new customers and talent: Going public creates awareness of the company with potential customers and can also help recruit top talent. It is a mark of success when an IPO generates both of these highly valued assets.
  • Supplier Confidence: Suppliers generally see the going public process as a net positive for the IPO company in terms of stability and long term growth prospects.

Ways to make success more likely

There are many ways for a company going public to attract investors to its IPO. Generally, a company that has higher growth than the industry average will attract investors from the buyside. Investment bankers seek out companies that can fulfill several criteria to boost the chances for a successful offering and solid performance in the aftermarket. Here are some elements that can make the IPO more likely for success:

  • A large, growing addressable market
  • A unique and differentiated business model
  • An attractive product or service, preferably one with a competitive advantage or first-mover status that creates a “moat”
  • Strong topline revenue growth with significant, sustainable and visible projected revenue growth
  • Strong margins and cash flow generation
  • Established track record
  • An experienced, “public company-ready” management team
  • Robust financial, operational and compliance controls

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 a one- to two-year period. This window gives a private company time to build the capabilities to think, act and perform as a public company.

The preparation process can often be lengthy, depending on the maturity of a company’s existing processes. It is vital that the company understand and address any gaps and secure the success elements listed above before going public.

Three stages of IPO preparation

In our experience, a successful IPO has three equally important elements:

  1. A thorough IPO readiness assessment, where big picture issues are identified early and realistic timetables are established based on the offering’s strategic 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.
  2. A working group focused on the immediate process of going public.
  3. A working group focused on the tasks needed to prepare the business for being public.

To get more information about these three stages and how to prepare for and enable a successful IPO, read our in-depth report, Roadmap to an IPO: A guide to going public. If you’re in stage one of the IPO process, see our resources around how to conduct a thorough readiness assessment.

Don’t go it alone

When you are pursuing an IPO, having an advisor with the right experience and insight can make the difference in helping you achieve your objectives. At PwC, our unique vantage point allows us to spot opportunities to help advance your strategic agenda. Our deals strategy, Capital Markets Advisory and execution and implementation professionals not only give us a holistic and deep knowledge of your business, but also insights and ideas across sectors and geographies.