From Private to Public: The Options You're Not Considering
For many companies, going public through an initial public offering is the ultimate goal. IPOs have many benefits -- from raising capital to buying out private shareholders to redeeming debt to building credibility with customers and employees. And as companies scale and develop, IPOs remain a viable way to gain liquidity. But thanks to various structural, market and regulatory conditions in the United States, companies aren't going public at the same pace they used to.
This is a dangerous trend: By staying private longer, companies don’t boost the larger ecosystem or gain the discipline and maturation required to survive on public markets.
Entrepreneurs may be hesitant to pursue an IPO for a few reasons. The combination of uncertainty surrounding the Trump administration, China's slowing economic growth and the precarious political situations across parts of Europe have made management teams understandably unsure of how to proceed with possible IPO plans.
It's not surprising that the number of IPOs in the United States fell from an all-time high of 363 in 2014 to just 128 in 2016. While there has been meaningful improvement in 2017, there’s still ongoing uncertainty around the future of the United States IPO markets, especially for small- and medium-sized companies.
Entrepreneurs may also be deterred by some high-profile disappointments that show how difficult going public can be. We only have to look as far as Snapchat’s IPO experience to realize that the hype surrounding a business cannot accurately indicate its growth once on the public market. The truth is, IPOs are hard -- even tech titans face growing pains, and need to continue to mature their business and adapt to emerging markets long after they've gone public to deliver results.
What those who see an IPO as their endgame don’t always realize is that other paths can lead them to the same destination. IPOs are not the only way to reap the benefits of going public, and the United States is not the only market where companies can find the funding they’re after.
Management teams must ask themselves whether there’s an alternate route to the public markets that may be easier or more beneficial. Here are some strategies to ensure you're considering all options:
1. Look for financing, not liquidity.
Though you’re likely in your business for the long haul, venture capitalists invested in your business potentially aren’t. According to Steve Blank, they expect to be able to cash out within seven to 10 years. That means you must have access to the financing necessary to reach a liquidity event within a fairly brief timeline.
The No. 1 piece of advice I can give to entrepreneurs who are evaluating whether they should list publicly is to look at it as a platform for financing growth -- not purely as a liquidity event for your shareholders.
Whether liquidity for shareholders is achieved through an acquisition or by going public, your company needs to have a business plan that delivers value, and you need a reliable source of capital to execute on that plan. The bottom line: Don't trade your long-term strategy for short-term gains.
2. Understand what makes your company valuable.
A company does not need to have large revenues to go public. Just look at GoDaddy, which launched an IPO in 2015 after going 18 years without turning a profit.
Companies looking to go public need to have a solid business strategy, realistic milestones and a clearly articulated plan for delivering results. In GoDaddy’s case, that meant proof of regular revenue growth, reduced operational costs and intelligent management team appointments over the course of nearly two decades.
It’s the potential for profit that investors are looking for, and they want to know that entrepreneurs have the talent and road map in place to get there. Once that’s outlined in an honest and actionable plan, it's much easier to secure funding sources -- the simple act of making a plan can increase success rates by as much as 16 percent, according to research from the Strategic Management Society.
At the very least, you should have indications of what customer attraction looks like or what your development will entail. For a biotech company, that means determining what the approval process or trials look like, whereas a mining company would carefully outline its drill program. Determine your most important KPIs and draft a hiring plan that includes individuals who will lead your company into tomorrow.
3. Be honest about your motives for going public.
Remember, going public is a strategic step. Companies do it because they're trying to secure funding in pursuit of a specific milestone.
Fintech startup BTL listed on the TSX Venture Exchange -- the organization I head -- because it wanted to develop its blockchain platform, Interbit. When company leaders announced their pilot program with BP, its stock performed very well, allowing BTL to raise more money at sequentially higher valuations. Achieving this milestone built credibility that further supported its valuation and access to capital.
You and your management team must be self-aware enough to understand why you want to go public and how viable the strategy actually is. If you don't have stable footing or know what direction you want to go, the public markets won't be very supportive. If you’re looking to use the public markets as a venue for last-resort financing, that's not likely going to work well, either.
A stable business isn’t often built on a short fuse. By listing on a venture exchange earlier, there's an opportunity to raise liquidity for shareholders at various points in a company's life cycle versus one big IPO event.
4. Consider an RTO.
A reverse takeover, or RTO, is another option for a private company looking to enter the public markets.
Without diving deep into the mechanics, a private company locates a public vehicle -- either one that has been set up with the sole purpose of finding a potential transaction (known as a capital pool company, or CPC), or one whose original plan did not work out. Ownership of shares in the private company are exchanged for shares in the public company, making both of them a single public entity.
This share exchange mechanism typically allows the private company management team to retain more control over the transaction, back-end load most of the costs and retain a higher valuation for its shares.
Though an RTO doesn’t guarantee a smooth transition into public markets or even success once your company arrives there, it does offer some additional flexibility that many entrepreneurs find attractive.
There is no one-size-fits-all strategy for taking a company public, but it should be seen as an opportunity, not a last resort. It’s a chance to finance growth, build a profile and provide some liquidity to early shareholders. Entrepreneurs don’t have to follow a path that's fundamentally unsuited to their company and their future. By taking every option into consideration, young companies can locate the best path into public markets and toward long-term success.