An Initial Public Offering (IPO) is a huge step for any company. In most cases, it is also a step that does not accomplish the goal of raising funds for furthering business development. Statistics show that 80 percent of the IPOs launched during the past 40 years have failed.
Still, it is an option that works for one in five companies, which drives many to take the risk. Nasdaq reported that, in 2021, more than 1,000 companies launched an IPO, with winners raising more than $285 billion. What separates the companies that succeed from those that fail?
“An IPO is a complicated process that involves a lot of preparation,” explains Diane Yoo, Founding Partner at Parliament Ventures Fund. “When companies fail to understand the variety of factors that can affect the reception of their launch, they dramatically increase the potential for failure.”
Parliament Ventures is a global team of venture capitalists, investors, and entrepreneurs that bring a wealth of wisdom and a vast network of co-investors to those looking to fund enduring companies. Its specialty is advising international firms that are expanding into US market to build a global platform.
Determining the proper valuation
Diane points to over-valuation as one of the main factors that can threaten the success of an IPO.
“The bulk of the work that goes into a successful IPO involves attracting investors,” says Diane. “When investors do not agree with the assessment of the company’s value, the trading price for its stock will fall short, short-circuiting the company’s plans for growth.”
The issues associated with over-valuation point to the importance of utilizing a reliable investment bank for the valuation of a company. Companies should focus on partnering with investment banks that have a proven record of managing IPOs in their sector. Investment banks will also play a key role in managing a successful roadshow, which is another essential step in attracting investors to an IPO.
Determining the proper timing
Market conditions are another key factor that can affect the success of an IPO. However, IPOs can have an onramp of six months or longer, which means it is virtually impossible to predict how the market will be performing at the time of the launch, or its potential impact on investor interest. A better approach to properly timing an IPO involves ensuring that it falls during the proper time in a business’s lifecycle.
“Transitioning from a privately-held to a publicly-held company requires a higher level of reporting and accountability,” Diane explains. “Gearing up for an IPO will involve ensuring that a company not only has the right systems in place, but also the right team to drive compliance, growth, and profitability. Until that important work has been done, it is not the right time for an IPO.”
Determining success
In the short term, IPO success has everything to do with the capital raised at the launch. However, IPOs can also have long-term benefits for a company. For example, a new company that has yet to attract media attention can create a buzz with a positive IPO that increases its visibility.
While there are many steps that a company can take to improve the probability of IPO success, there are clearly no guarantees that they will succeed. Still, when a company’s best efforts fail to result in a productive IPO, all may not be lost; companies can pivot to a new path that does not rely on the funds it has sought through the IPO.
“Don’t waste the experience,” Diane advises. “Entrepreneurs will have successes, but will have far more failures. Such failures are powerful hub of wisdom to pull from, creating more resilient companies that are built from your lived experience.”
