Like the temperature outside, the IPO market is red hot. U.S. IPOs raised nearly $40 billion in the second quarter alone, the busiest quarter for IPOs in twenty years. With the year just half over, IPOs have already beaten last year’s record mark. And the feeding frenzy shows no sign of slowing down the rest of the year.
(An IPO – initial public offering – is the process whereby a privately owned company becomes public by listing its stock on the NYSE or NASDAQ or other exchange.)
What’s driving the uptick?
There are several drivers behind the rush to go public, including a sense of urgency to cash in on high valuations and liquid markets. And there are more opportunities for individual investors to get in the game. Online brokerages like Robinhood Financial LLC, for example, offer small investors access to IPOs that were previously inaccessible.
Before joining the party
It’s easy to get caught up in the IPO excitement. But it’s wise to proceed with caution.
Going public is complex and time-consuming. The entire process, from initial planning to listing on an exchange could take years if you are not properly prepared. Gearing up for an IPO is like entering a new world, one which requires a strong balance sheet, strategic planning, financial disclosures, internal controls, corporate governance, regulatory reporting, and the ability to “sell” your story to investors.
Can you answer these 10 questions?
Private companies thinking about going public will need to address many questions, including:
- Is an IPO the right move for our company and when should we move forward?
- Is our company financially strong enough to go public?
- What will we use the IPO proceeds for?
- Can we convince potential investors that we are different from our competitors?
- What kind of corporate governance do we need, and do we have the right mix of people and expertise on our board of directors to influence that governance?
- What stock exchange should we list on?
- What are the listing requirements of that exchange?
- What does it cost to go public?
- What experts should we rely on for advice?
- Are we auditable?
Assemble the right team
Few companies, particularly small- and mid-sized ones, are equipped to answer these questions without assistance from professionals who know how the capital markets operate. Navigating the IPO process typically involves a team of experts, including an investment banker, legal counsel, independent PCAOB (Public Company Accounting Oversight Board) auditor, and perhaps others. To help determine which professionals would make for a cohesive team, some companies consult with an independent IPO advisor.
Investment banker
One of the first steps is selecting the right investment banking partner. Take your time with this decision. Investment bankers play a key role not only in the IPO process, including valuing the business, pricing the offering, and promoting the company’s shares to investors by managing the roadshow, but also in providing aftermarket support, research and coverage.
Some factors to consider:
- Is the bank the right fit for the size and structure of your financing?
- How well does it know your industry?
- What IPOs has it worked on in your industry and how well did the stocks perform after the listing?
There are many reasons for smaller, high-growth companies – especially those in emerging industries – to consider an IPO. Taking a company public, however, is a long and sometimes challenging road. Preparation, patience, and having the right team on board are critically important.