Initial public offerings (IPOs) are the most popular way of getting your startup on the stock market — but how do you know if you’re ready?
First, a refresher: an IPO is when a private company first issues shares on a public market, meaning it transitions from a private company to a public company and can trade amongst all investors on the stock exchange.
The major benefit of an IPO is access to new capital — and a lot of public visibility during a key growth stage. “It’s probably the number one marketing event you can ever have,” says Dwight Burden, managing director in the strategic communications division of advisory firm FTI Consulting.
If you’re considering an IPO, there are a few questions experts say you should ask yourself first to make sure it isn’t a flop.
1. Are you prepared for scrutiny?
An IPO will put your business on the public stage, meaning more scrutiny — and more opportunity for mishaps and PR mistakes. Companies need to make sure the press and investors not only get to know your brand, but also focus on the right message, says Rob Mindell — one of FTI Consulting’s managing directors who works on reputation management.
In order to refine their brand messaging, Mindell says founders should be asking themselves questions like ‘What is the core purpose driving my business?’ and ‘How will we be impacted by technology and societal trends?’
These questions prepare startups for what Mindell calls the ‘big bang’ moment, or the moment when the public and press really get to know you, and poke holes in your business.
This ‘big bang’ moment can be a double-edged sword if your messaging and branding isn’t on point. Burden says companies considering an IPO should get ahead of the curve and start building a fan club by spreading their brand via digital communities and corporate networks: “You want to be building that fan club early. Our research shows a lot of companies fall short on that front.”
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Companies considering an IPO should get ahead of the curve and start building a fan club by spreading their brand via digital communities and corporate networks.
Burden cites FTI Consulting’s Resilience Barometer research, which finds early stage businesses are less likely to have strong relationships with business media and industry groups than their more established peers.
Cofounder of VC fund OTB Ventures Adam Niewinski agrees, saying companies must consider whether they’re prepared for scrutiny: “When you’re a publicly listed company, there’s no space for a mistake, there’s no space for an error.”
2. Are you prepared for a cyber attack?
Going public means more attention, including from bad actors. Mindell says businesses looking to IPO should audit how secure their technology infrastructure is.
This has become increasingly urgent during the pandemic, as most of the global workforce has moved online. FTI Consulting’s survey of G20 nations found 32% of companies had customer data stolen over the last 12 months and an estimated $18bn was lost in 2020 due to cyber attacks.
Mindell says this is an essential part of assessing whether your company can withstand the rigour of going public.
“If you haven’t, as a management team, gone through the thought experiment of what do we do if a cyberattack occurs — what do we do if personal data is compromised? — then perhaps you haven’t fully considered all the risks and tough questions you have to go through on that journey from private to public,” Mindell says.
If you haven’t, as a management team, gone through the thought experiment of what do we do if a cyberattack occurs... then perhaps you haven’t fully considered all the risks and tough questions you have to go through on that journey from private to public.
To manage this, Mindell suggests putting protocols in place, looking into whether you own your data or whether it's managed by third parties and assessing how it’s stored. He also suggests businesses rehearse for data breach scenarios, specifically looking at implications for all stakeholders — customers, employees, regulators and investors.
3. Is now the right time to go public?
Often the marker of a successful IPO is timing — both for the market and for the business.
“One of the greatest considerations for a company going through an IPO process is timing,” says Nickyl Raithatha, CEO of digital greeting card company Moonpig, which had its £1.2bn IPO in February. “We had confidence that it was the perfect time, as leaders of a market undergoing an accelerating shift to online.”
One of the greatest considerations for a company going through an IPO process is timing.
‘The right time’ also means the team is ready to be in it for the long haul, and prepared for how this will add more on their plate.
“I took a while to get used to the balance I needed in my working life, between dealing with my management team, my staff, my customers, having time for strategic matters and then also shoehorning investor relations,” says Jonathan Satchell, CEO of Learning Technologies Group, a learning and talent market which went public back in 2013 via a reverse takeover, otherwise known today as a SPAC. “It does take up quite a lot of time.”
4. How sustainable is your business?
Another consideration when going public are ESG or environmental, social and governance metrics — a set of standards businesses publicly report. These include everything from CO₂ emissions and global supply chain audits, to diversity and inclusion commitments.
“Investors are increasingly seeing ESG as an important area,” says FTI Consulting’s head of sustainability Helen Nowicka. “If a business can demonstrate that it’s thought about ESG, it’s likely to be a more resilient business, long term.”
An increasing number of tools and consultancy firms are emerging that help measure businesses’ green credentials, like FTI Consulting’s ESG Compass or Plan A Academy. These allow companies to measure their emissions, make plans to reduce their footprint and even buy carbon offsets — where you compensate for your own emissions by funding an equivalent carbon saving project elsewhere.
Last month, pressure on investors to address sustainability grew as ESG disclosure obligations under the EU Sustainable Finance Disclosure Regulation (SFDR) became mandatory for asset managers, VCs, private banks and other financial market players.
“The reason companies should be thinking about [ESGs] before they IPO is that putting these right measures in place can take time — working on the strategy also takes time,” Nowicka says.
If a business can demonstrate that it’s thought about ESG, it’s likely to be a more resilient business, long term.
5. Have you considered the SPAC route?
Before settling on a traditional IPO, consider SPACs. Special purpose acquisition companies (SPACs) are shell companies which raise funds in an IPO to then merge with an existing company.
Historically, SPACs underperformed financially, but they’re the investment craze of the moment.
For established entrepreneurs with a specific vision and a track record of growing businesses, the speed of execution is a key pull of SPACs.
The US is leading the trend, where big names such as Serena Williams and Alex Rodriguez have jumped on SPACs as investors, and high profile businesses such as Virgin Galactic and Opendoor have gone public by merging with SPACs. But celebrity cachet isn't a requirement.
“You might have a business which is really innovative, that’s quite cash hungry and there’s a good chance they’re going to move quickly. For businesses like that, this is absolutely the right vehicle for them,” says Burden.
You don’t need to score 5/5 to start the IPO process, but the reputational risks and challenges can be more easily navigated by having the right people around as experts and advisers to amplify your business profile. Learn more about how FTI Consulting can help you get there.