Most startups begin with two things: a powerful idea and dream of a big IPO payday. Companies around the world, from Silicon Valley to Sydney’s SUPER Digital Precinct, are usually focused on building a business that will allow them to list on a stock exchange. They view the IPO as both the light at the end of the tunnel and as the ultimate sign of legitimacy for their ideas. But, is an IPO always the right move for your company?
Advantages of an IPO
There are many advantages to an IPO. Getting listed on an exchange such as the ASX, OTC, or AIM does expand the public awareness of the company and does add a sense of legitimacy. An IPO is also a way to reward early employees and investors who often worked hard and stood by the company without much in terms of compensation.
Once a company is listed on a stock exchange it also makes it easier to raise a lot of capital without having to be accountable to a small band of venture capitalists. Many times founders feel that an IPO comes with a certain amount of freedom to grow the company according to their vision.
Downsides of “Going Public”
But, going public through an IPO is not without some negative consequences. Publicly traded companies are subject to more regulations than privately held companies. Many times companies find that while they no longer have to answer to venture capitalists, they still are subject to the influence of large shareholders and stockbrokers.
Having an IPO creates certain duties towards your shareholders.
The process to going public is always a little bit of a gamble. The amount of capital you will raise is always uncertain. Even if you have a strong valuation, events completely unrelated to your company could tank the market the day you decide to go down the IPO path.
If you do not raise the amount of money you were expecting, you could even start a death spiral. Investors could lose confidence, you may have a hard time raising adequate capital to grow, and instead of your IPO launching your company into the stratosphere, it could signal the beginning of the end.
Each company and market are unique. An IPO makes a lot of sense for some companies. But, an IPO is not the only option for companies looking to raise capital and take the next steps.
The key is choosing a funding strategy that is in line with your corporate strategy. Before deciding to work towards an IPO, smart founders will consider all of their options and get advice on what course of action will best serve their goals.
Instead of an IPO, some companies may be better off pursuing an alternative strategy for raising capital such as:
- Private equity
- Strategic investors
While IPOs will continue to be the sexy option for many entrepreneurs, founders of companies who want to make sure their company lives up to their vision and is built to outlast them will carefully look at all of their options before rushing for the IPO exit.
© Saint Gabriel Pty Ltd 2017