Top 9 Tips to Conduct a Successful IPO

By | 05/26/2020 | 2:01 pm ET

In our research, we came across an article that had a graphical illustration of declining IPOs from 1999 to 2018, and astonishingly it is almost 60%. Nearly all private companies aim to go public because of the associated advantages eventually, but only a select few have been able to do so. 2019 was comparatively a successful year with Unicorns making their debut, continuing in 2020. Unfortunately, the current pandemic in the form of the novel coronavirus Covid-19 continues to keep us gasping for breath, but we are optimistic about future IPOs after the epidemic ends. So here are the top ten ways that if taken seriously, will ensure a successful IPO:

1. Market timing:

The primary purpose of an IPO is to raise money, but it does not make sense if there is little money in the market. This scarcity can happen for various reasons such as a financial crisis, economic bubble, natural disaster, or political upheaval where investors do not have much confidence in the market. Another point to consider here is if the company is making a hasty decision or not. Remember Goldman Sachs’ IPO withdrawal in 1998 because of the Asian financial crisis that paid off well the next year with a 33% raise on their first day of trading. However, Twitter failed because of its early jump as it was still not making profits.

2. Story proposition:

Beyond Meat owns a story that is close to the hearts of vegans and even meat lovers who want to give a chance to the plant-based meat producing company. There has been increasing awareness over the years on the advantages of going meatless and, most importantly, not harming animals. Beyond Meat garnered a 163% rise in its IPO on May 2nd despite a $30 million revenue loss a year earlier.

3. Marketing/roadshow:

Consider this as salt, where you want to be right about the amount used. Because overly aggressive marketing campaigns can often lead to violations in SEC rules, it is important to use the guidance of knowledgeable securities attorneys or investment bankers in your marketing efforts. One of the reasons why Groupon failed in ringing the bell was a bad roadshow. It ended up under the strict scrutiny of the SEC by violating the SEC’s “quiet period” rules and hefty marketing expenses.

4. Building the right team:

You want to ensure that your Legal partners, Underwriters, Accounting staff, and Transfer agent are trustworthy and experienced, so you do not end up in soup like the famous Facebook underwriter glitch!  Instead, you want to be a success story like Visa, where underwriters were cautious about the probability of buyers flipping shares and were able to avoid it. Visa’s IPO marked the largest in U.S. history at the time, demolishing AT&T’s six-year-old record of $10.6 billion. Similarly, ensuring that you have a reliable transfer agent will save you from stock transfer mismanagement.

5. Price your offering correctly:

It is essential to meticulously compare your revenue and financial data with your competition before you price your offering. Remember, investors do their due diligence. Peloton, the fitness startup, is one recent example of being turned down by investors who refused to value the company at more than 11% of its revenues, notably when the company reported a four-fold increase in operating losses. GFL Environmental shares the same story!

6. Good management:

Good leadership makes or breaks the deal, which is why this topic remains a favorite at all academic levels. The CIT Group went down by 4% in their IPO in 2002 because of Tyco CEO Dennis Kozlowski who was under investigation for tax mismanagement and resigned only a month before the offering. Tyco acquired top business lender CIT in 2001.

7. Share structure:

Dual class share structure can limit larger investor participation because founders often control voting rights and decision making, giving shareholders little or no say in the company. Snapchat, Domo, Dropbox, and GreenSky are some examples worth noting.

8. Good bargain:

On average, 4-10% of IPO proceeds go to bankers, but Google was smart to crack a deal with Credit Suisse and Morgan Stanley of just 2.8% allowing the company to pocket an additional 7.2% of the proceeds. Do not forget the objective of an IPO is to raise money, and every penny saved will add to your operating capital.

9. Selecting a stock exchange:

There are different stock exchanges in the market that allow you to offer your IPO; NYSE and NASDAQ being the two most prominent. Each of these exchanges has its own set of minimum requirements, regulations, prices, and the environment. For example, Kraft Foods made a switch when it saw more marketing value in the NASDAQ electronic billboard at Times Square, and LinkedIn preferred NYSE as it saw more prestige there.

Top 9 Tips to Conduct a Successful IPO