This time last year the IPO market experienced a period of rejuvenation, following the slump in 2016 which continued throughout the year. With companies such as Snap Inc. making the leap and Airbnb and Uber declaring that they are not far behind, it is clear, for the tech industry at least, that IPOs mean big business. 2018 looks to be positive where tech companies are concerned; Swedish music streaming service Spotify have just announced they are looking to progress with a direct listing on the New York Stock Exchange in the next six months.
When considering going public, timing is crucial if the venture is to be a success. For example, Airbnb recently announced that they plan to delay their IPO, after raising $1bn of VC funds. This is a good example of internal timing consideration, but it is also important to consider the external factors that could impact on the success of an IPO.
Periods of economic and political uncertainty can be a determining factor in whether companies choose to make the jump promptly or sit back and wait out the storm. 2016 saw Britain vote to leave the EU and coupled with the US election result apprehension, anxiety and economic volatility began to set in. This led to the IPO market experiencing a dry spell – 2016 saw the lowest activity since 2009. When experiencing these periods of global uncertainty it is important to evaluate the longer term effects of such seismic events, the consequences of which are likely to be felt long after the initial occurrence. Ensuring there is a thorough understanding of the level of investor appetite for tech businesses throughout these periods is crucial. Understanding wider market activity will result in a more comprehensive assessment of the right time for an IPO, but is not the be all and end all. Arguably there is never a ‘right time’ to float, but knowing the current market and having a solid strategy in place from the start ensures agility and flexibility once there is a peak in investor appetite.
Lessons can certainly be learnt from Snap Inc.’s listing on the New York Stock Exchange in March last year, where the shares offered to the public had no voting rights – much like Facebook and Google. This means the founders and initial investors in Snap Inc.’s are able to pursue their “entrepreneur’s vision” without facing any opposition from others. This unorthodox approach has been criticised as new shareholders won’t have any say in how the company evolves, despite showing a commitment by investing. With Snap Inc.’s share price having slumped below the IPO price, the company is likely to be put under further pressure as investors continue cash in. This approach calls into question the founder’s choice of timing and the decision to issue non-voting shares. With many declaring Snap Inc.’s IPO venture a failure, it is clear both time and strategy are determining factors in whether a float is likely to be a success.
No two IPOs are the same
Typically a company looking to list will either be mature, with steady revenue streams, or will have high growth projections. They may be large at the date of listing, being a more mature growth business than those that may have looked to list previously, as Airbnb is on course to be. Rapidly growing tech companies in particular should be able to demonstrate both high and sustainable projections through their business plans, as well as a pathway to profitability and a management team that appeals to investors.
But, it is not unusual for tech companies to be making a loss or just breaking even at the time of the IPO. For example, Spotify’s losses for 2016 amounted to just over $600million, despite having tens of millions subscribe to its service. However, the company has exciting long term profit potential as a result of their vast customer base. A few days after announcing their plans to go public the number of paying subscribers reached an impressive total of 70 million. This is 10 million more than in July 2017. The growth means analysts now estimate the company could be worth at least $20bn if public, compared to $8.5bn back in 2015. This shows how attractive and achievable growth projections, demonstrated in a company’s forecasts and business plans, can assure investors of longer term profits. It is crucial that business owners understand that investors will consider the potential longevity of a business in detail, particularly if the company is making a loss at the time of listing.
When considering an IPO management teams need to be clear on the reasons for doing so. Going public should never be seen as a vanity project or as a means for the original founders to exit the business. The process itself can be costly, so plans to float should always be aligned with the company’s strategic goals. Having experienced, supportive and strong advisers in place from the offset is important when planning an IPO strategy as the process can distract management from the day to day running of the business. The process can also occupy significant resource, both during and after the event. Preparation, planning and building a solid and experienced adviser network are the three key links in the initial stages to ensure a smooth and successful IPO.
Ultimately, every IPO will be different. Ensuring the IPO strategy is aligned with the business’ goals and forecasts, the management team has clear priorities and there is suitable resource allocated to the process is a must. It is unlikely these will all be in place in the initial stages of the IPO, so getting the right help is invaluable. Timing is arguably the most crucial element of all and those working alongside an experienced advisor are well positioned to ensure their IPO is a success.
Laura Mott, partner at top 30 accountancy firm haysmacintyre
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