Supplement Perspectives
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Is Your Company IPO-ready?

Regular contributor Mark Becker on how you should answer that question.

Being your own boss is often stereotyped as living the “American Dream.” Once a company has achieved profound success, most entrepreneurs will inevitably think IPO — one final moment where a big payday will send the big boss off into retirement.

In reality, an IPO is very complicated, even for natural products companies. In making the choice to go public, key company players must understand that it is a long road. An IPO is an expensive and grueling process that distracts key company players from the core business. And a failed attempt at an offering can damage a company’s credibility for many years.

That’s why it’s vital to be sure a company is ready to go public before it can begin the formal process.  That said, one vital area of consideration is that solid operating metrics must be in place.  A company just doesn't grow to a point where an IPO will happen without a hitch. Entertaining an IPO requires company players who are ready to defend their company and it has a plan to make it work as a public company.

And the best way to defend any company is by having hardcore data. I equate this to considering a new nutraceutical product to add to my vitamin regimen. I have to see that the product is efficacious. The only way that is accomplished is by showing me the data. Is that product clinically validated? The same can be said of a company considering an IPO. Your company data has to tell a story. It has to show it is capable of making money. Wall Street needs to trust your ability to make money and keep making money. The company has to build predictability. And that is done by analyzing the data.

While preparing for an IPO, key players should focus on two things: gross margins (profit) and growth. As functional businesses, we all know that gross margin is calculated as revenue minus cost. It is basically the amount of money you make selling a product or service after you account for the cost of that product or service to the buyer. It's the money you make after all is said and done. When considering an IPO, gross margins must be consistent and always improving.

If you truly believe your company is IPO ready, have you considered the following:

  • Have you created a network effects advantage in your business or product? In other words, when a network effect is present, the value of a product or service is dependent on the number of people using that product or service. You need to take a good look at sales and potential for growth. Sales have to be robust. And they need to continue in that same direction. And that includes a plan for sustained growth.
  • Is your sales and marketing team prepared to handle customer acquisition costs and growth? Is an infrastructure in place that will support growth? Do you have multiple processes built into your business plan? These processes will define a path for growth in a business environment that is always changing and encountering external conditions that are often out of your control.
  • Do you have multiple processes built into your business plan? These processes will define a path for growth in a business environment that is always changing and encountering external conditions that are often out of your control.

An IPO can be a great strategy for a business to grow – and grow big – but it's not for everyone. Be aware of the following:

  • IPOs are EXPENSIVE. An IPO can cost hundreds of thousands of dollars with no guarantee that it will go through. This is obviously high risk.
  • You no longer operate under your own rules: An IPO will subject a company to new rules and regulations. For example, going public will subject the company to governing bodies like the SEC. Governing bodies like the SEC can often be very demanding. In fact, additional compliance staff are often hired to work with these types of agencies.
  • Risk of takeover. Once your company is publicly traded, anyone can buy shares—even your competitors.

Additionally, when considering an IPO, clarity, concision, and consistency are the keys to effective communication with the investor community. Remember that you must choose messaging that inspires confidence. If the message is muddled, analysts will move on. 

Furthermore, the time to create relationships with key investors should be done one to two years before the IPO, not weeks leading up to the IPO. These people need time to get to know the company. The IPO process is a short one. There isn’t enough time to truly understand all company details in a short timeframe. Moreover, the IPO process is the only time the company can choose its investors. After the company is public, the investors will pick you.  That said, the executive team must understand the IPO process. This process will include many presentations that must foster investor confidence.

Interestingly, one of the overlooked aspects of the IPO process is communicating effectively about what the company actually does. This means that a website must be in place and flawless. And all marketing channels must work in an integrated fashion – like a well-oiled machine. This sophisticated, integrated marketing campaign must communicate just as effectively as an investor presentation.

Finally, for as long as a company is public, sell-side analysts are going to write regular reports about the progress of the company, or lack thereof. Meanwhile, those on the buy-side will be keeping an eye on the company and their investment. An IPO is not for the faint of heart. It is a very long, complex, expensive, and grueling process. Consider all your options and consult people who are truly “in the know” before making a final decision to go public.

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