To IPO or not to IPO. That is the question

Over the Last 25 years I have been involved in two IPOs. The first IPO was on the US Nasdaq market and the second on the French Alternext market. Both companies were digital but with different focuses.  One had a recurrent business and the other was based on one-shot campaigns. However both had similar goals by going public. They both wanted to raise funds for expansion and build communication thanks to the actual Initial Public Offering. Both were very successful in achieving their goals.

The pre IPO work process is intense. Not only do you have to choose a bank to work with but you also need to work on your communication. Many meetings happen and they are all time consuming. Then, CEOs must focus on meeting potential investors during time-consuming roadshows. They must provide statutory information such as business plans, shareholders information, financial and accounting details. They must provide the SEC or the AMF (US and France) all legal papers, files and documents. And in the meantime, the CEO must continue to deliver the business, manage the company and ensure that the numbers are always in line with the business plans presented. This is a tough job as one cannot be prioritized over the other, they both require the same attention. Here I can say that the first company in the US was much more organized and did a superb job at managing both sides than the company in France. This was also probably because the CEO trusted his teams and knew that numbers were going to be delivered (as the business was recurrent and therefore was much more predictable).

Once the pre IPO work is done and all is approved by the Securities Commissions and Regulatory Agencies, the money comes in the bank account and then what? If the company has announced to the market that it needs to accelerate the development then the follow up is pretty straightforward. The projects can be engaged and the development happens faster. On the other hand when the company announced that the IPO was needed to build market share or to acquire some know how, then it is very important that the list of prospects is already in place and that conversations had started already. It takes between 6 to 9 months to acquire a company when it takes about 6 months for an IPO. If you decided to do one after the other, you are counting over a year to acquire your first company. This means that you already have had to present your results to the market. The market will make you pay if it realizes that in the first year the money has not been spent to get the bottom line improved or to get more know how within the teams.

The fact that a company is listed on the market means that it will follow a lot of rules (investors meetings, results announcements, accounting rules…). It also means that it depends on the market trends (out of the company’s control as it depends on the economic, political and market situation).  Finally it depends on analysts’ goals and impressions. For example, sometimes companies need to focus more on revenue than on EBIT because of the market, the competition or because of predictions. If you are involved in your business, it makes sense and you would not even think twice about it. However an investor might not understand this and then could decide to sell and let the stock price go down because he/she sees lower productivity. Being listed is very tricky. Not being public has its advantages as you normally deal with only a handful of investors. You can then talk to them all and explain the situation. In any case, your stock is not listed and therefore you run no risk relating to stock market fluctuations. However, with a handful of investors, sometimes, it might be more difficult to raise large sums of money, like you would with an IPO.

In conclusion, there is no magical answer, a lot of financial tools are available to companies, and each of them must fit the company’s requirements.  It is important to understand that IPOs are a fund raising exercise with an underlying communication benefit. They allow companies to raise money for specific projects (accelerate development, go international, major products development….). So the major goal is to raise funds. If companies use IPOs only to raise awareness and to do a PR exercise then the IPO will fail or the post IPO activity will be very difficult. It is essential that the long term plan is seen for 3 to 5 years. The essential KPIs for a post IPO company are return on investment and productivity. Once your plan to investors is explained clearly, they will only judge you on this. Investors can also look at how you spend the money raised and here again, you would need to be consistent with what you promised the market. Any change in your plans, any numbers different from what the market is expecting and you will pay dearly with your stock price and your credibility will weaken. IPOs are a great way to raise money, it is also a great way to get more investors but very often they do not understand the market and the business. This is why a “working” roadmap is essential, meaning a roadmap that is always updated, explained and shared during the many investors meetings. If you follow your plan and what you communicated to investors then you will enjoy a very nice ride but if this is not the case, the communication could go the other way and work totally against you!