After raising funds for your startup through fundraising rounds, there are two options to either fully or partially exit. Many companies try to go public with an Initial Public Offering (IPO) or exit with Mergers & Acquisitions (M&A). The main reason why companies choose to have an IPO or M&A is usually when the company wishes to raise more funds or for investors to exit to get their returns. In this article, we will discuss more on what exactly is an IPO, as well as its advantages and disadvantages.
What are IPOs & M&As?
When hearing about companies having an IPO, we often think about established startups that are looking to expand their company further. Proceeding with an IPO is often the last step of the fundraising process. An IPO refers to the process whereby a private company offers shares to the public to purchase, and hence, with an IPO, a company is now allowed to raise capital from public investors. Many companies use this method to generate more funds, or an exit strategy by selling off the company’s shares.
M&As, though less common than IPOs, usually refer to being acquired or merging with another larger yet similar company. This method is often chosen by big companies that seek complementary skills in the market and realise that merging with a smaller company is a more efficient way to develop a new product and to progress further.
Advantages of IPO
Going public with an IPO has many advantages, ranging from the main purpose of raising funds, to increasing the visibility of the company. Here are some of the reasons why startup owners choose to go with the IPO route.
- Raise Funds
The primary goal of going for an IPO is to raise funds. By issuing fresh and new capital, the company can raise funds for growth. Receiving capital from the market and meeting the company’s needs can reduce the financial burden if any. Therefore
Going public means that the company can use its shares as a bargaining chip. When negotiating an employment contract, these companies can sometimes offer their shares as a bonus to retain staff. This method is especially used for retaining key and important staff to the company.
- Increasing Visibility
Going through an IPO is often big news, and getting listed on the stock exchange will mean that the company will receive media coverage. This increases the company’s visibility and will in turn help to potentially increase its customer base and sales.
Disadvantages of IPO
- Need to Disclose Financial Information
Public companies are required to disclose critical information, such as financial information regularly. This means that if the company is not doing well financially, this piece of information can significantly reduce its share price and market standing.
- Expensive & Time-Consuming
Going public is an expensive and time-consuming process. There are many costs involved, such as legal, accounting, and printing. These costs are sunk costs, meaning that they will need to be paid regardless of whether the IPO is successful or not.
Due to the challenging and time-consuming process, it is difficult for many companies to achieve an IPO alone. A private company planning for an IPO needs to be prepared for a sharp increase in public scrutiny. While doing so, the company also needs to file a lot of paperwork and financial disclosures to meet the requirements of the Securities and Exchange Commission (SEC), which oversees public companies.
When should companies IPO?
According to The First Round, founders should keep in mind the three tenets when starting a business. An IPO seems to be far-fetched for a small startup, but it is recommended to be a big goal of the company.
- Visibility & Predictability
When looking for investors (and their money), being predictable is preferred. Companies that have a haphazard growth pattern may seem less attractive than companies that can expect what is going to happen in the future financially.
Having a plan and being on track shows that the company has a good understanding of how they are going to perform financially. Being predictable may seem like a chore for early-stage companies because a common mindset is to “hope for the best”. However, sticking to a solid vision and being patient are huge green flags for investors. By focusing on the strengths of the product or service, gradual and steady growth will follow.
- Market Watch & Growth Potential
Conventionally, people tell startups to go public when their revenue exceeds $100 million. However, placing a benchmark on the company’s revenue is not accurate, as this does not accurately portray the company’s growth potential. A company can have a revenue of $250 million or more, but if the company does not have a clear route to growing further, the future may be a little bleak. Therefore, startups need to recognise if they can pivot and divert resources to achieve more if needed.
Invest time into expanding your market by building new products, acquiring competitors, or partnering with different companies to gain opportunities. Being flexible will bring the company potential success. Going public means that there will be more competition. As such, it is important to diversify what your company can do. Keep experimenting and grow your market reach with a solid game plan.
- Eliminating Single-Point Failure
This does not mean completely removing any possibilities of failure. This refers to being prepared for things that could cripple the company. For example, a very large customer order, a single distribution partner, or your sole supplier. If your company’s success depends on one external organisation to keep the business alive, a single-point failure exists. If these external organisations choose not to give your company business or even go out of business themselves, your company will not be able to sustain itself. The solution? Diversify.
A fast-growing company may focus too much on one distribution channel or depend on one huge customer. This could lead to a dead-end years later. Solving this requires patience and additional work. Most companies may be unwilling to give up their current growth rate to solve these issues. However, by being far-sighted, companies who work on expanding and diversifying their company before growing further will give the company a certain level of safety when going public.
As a growing startup, undertaking an IPO can bring many benefits for the company. Despite being an expensive and tedious process, the company can reap many benefits from it. Recently, companies like Grab, a ride-hailing application, and Oatly, an oat milk producer, went public in 2021. Even if your company is at its early stages, keep an IPO in sight and work towards going public. For companies that are considering an IPO, do not rush into it, and remember that being slow and steady will often bring the company greater success.
Liked this article? Subscribe to stay updated on our next article about Thailand’s Startup Grants!
Links & References: