For a startup, an IPO is an important milestone which boosts its sustainability by providing access to more capital and enhancing a company’s credibility. But a startup should not go for it when it is not ready.
Going for an IPO is a huge landmark for any company. It helps startups grow, expand operations, signal success to the market, and brings in outstanding deal opportunities. No wonder, founders often think about this possibility from day one of starting their company.
But how do you know that your startup is ready? It’s definitely not by age. In the US, according to a research by Jay Ritter from the University of Florida, the median age of companies going public between 1980 and 2021 was 12 years. Nonetheless, when the economy is booming, it may be just 4 years.
So, there should be other criteria that qualify your startup for an IPO and they exist indeed. You can use these five to evaluate if your company is IPO-ready.
Strong and Sustainable Revenue Growth
Your startup should have a history of sustainable revenue growth going back at least 3 years pre-IPO and the projection of this growth continuing for the next 3 years post-IPO. Putting these numbers together, you are basically doing a huge part of the work needed for the IPO process.
Going for an IPO, you need to showcase that your revenue will keep growing when the event is over. It helps make your startup more attractive to investors. After an IPO, your company will have to follow strict regulatory requirements, including regular financial reporting. This includes your quarterly and annual reports being picked apart by journalists and shareholders from time to time. It is best if what they see is continuous growth.
Established Market Position
Having a solid market share and strong brand recognition combined really helps when you are getting ready for an IPO and after that. It proves to investors that you have a loyal customer base and a reputation as a business and, consequently, it can bring up your valuation and generate more demand for your shares.
On top of that, a competitive edge that distinguishes you from other players in the industry can bring more attention to the event and reach a wider audience of potential investors. It is always helpful to reach a broader audience when your shares get traded publically and have a good reputation since your company is going to get much more attention from the regulatory bodies.
However, evaluating only your current positioning is not sufficient. You should have a vision of your startup’s place in the future. You need to be able to explain how your business is going to align with what will be happening in the world in the next 15 years in order to keep relevant and continue bringing in money.
It is a good exercise for any entrepreneur to think of the future. For instance, if your business is a call center, try to figure out how it is going to work in 15 years when AI replaces human operators.
Proven Business Model
If your startup has a well-defined business model that has been tested over time and proved itself to be profitable, it is a good sign too. It instills confidence in investors as well as indicates that your company has reached solid financial sustainability which will be a plus after an IPO too.
A proven business model indicates that you have a loyal customer base, can generate consistent profits, crisis resilient, and have growth potential after IPO. Besides, it is what regulatory bodies are looking for when assessing if a startup can be approved for the IPO process.
Solid Financial Health
A public company, unlike a newly-formed startup, is obliged to be transparent about its financial indicators. Consequently, prior to going IPO, make sure that your company can demonstrate a healthy balance sheet, positive cash flow, and profitability. Be sure, it is going to be checked and reviewed by
Also, being financially transparent brings up the state of your financial controls and processes to the public’s eye. They should be fit and help you manage the complexities of being a public company. Solid financial health is highly attractive to investors. Moreover, with all its advantages, an IPO is not a magic pill that can fix things that are not working.
Experienced Leadership Team
Your leadership team should have the expertise and experience to navigate the challenges of an IPO. Going for an Initial Public Offering is a stressful thing itself, but, after it happens, with numerous benefits, there is going to be even more stress. In addition, IPO means more work for all the leadership team. Make sure there is a strong governance structure with a capable board of directors in place in your startup.
Your C-suite will experience more publicity and will have to deal with the pressure from shareholders, go through occasional negative media coverage, and be ready that their smallest mistakes may get studied under a magnifying glass. Public communication skills and training, resilience to crisis, readiness to be transparent – these are only a few items of the list of what it takes to lead a public company.
In general, an IPO is a goal for a lot of businesses due to the strategic opportunities that it brings. It gives access to more resources, publicity, better valuation, new partnership and more benefits. An IPO is absolutely worth the try. But it should happen at the right time, when your company and your leadership team are ready for it.
