Going Public – A Series by Accel & Soaked by Slush – Article I
To go public or not go public? That is the question many startups are thinking of due to the current climate being exceptionally favorable for going public. Accel Partner Harry Nelis kicks off our article series on the topic with his take on the issue and goes through the things one should consider before making this decision.
For private technology companies, it may seem like there has never been a better time to raise money. With revenues and profits at all-time highs and multiples also climbing to new peaks, valuations have never been more favorable. That was reflected in a surging IPO market last year, with the US public markets welcoming almost double the number of new listings than in 2019. The private markets are no less busy: despite the interruptions of the pandemic, venture capital investment across Europe and Israel hit a new record level in 2020.
The reasons for this surge are familiar: the shift from offline to online industries accelerated by the pandemic, massive liquidity injections from central banks, and an increasing appetite for growth investments in a low-yield world.
For the companies themselves, the dilemma that follows is more complicated: how are they best to use these conditions to further the growth of their business? Should they stay private for longer in a market that allows larger and later fundraisings than ever before? Or, to liberally paraphrase The Clash, should they go and begin a new chapter on the public markets?
”Becoming a public company demands a significant shift in your approach to building a business. Things that worked as a private company will not be accepted on the public markets.
To answer that question, a company needs to consider two things: firstly, the advantages of operating as a public company, and when these start to become relevant to them; and secondly, the requirements of being a public company, and when these start to become feasible for them.
The advantages of being public can be counted in visibility, credibility, and liquidity. The public markets are deeper, they make companies better known to a wider pool of investors, and they compel them to meet a higher standard of audit and compliance – building confidence with all stakeholders. Going public is also a significant benefit for companies looking to make acquisitions: a listed stock provides a form of transparent, openly-valued currency that gives reassurance to counterparties and reduces friction in deal-making. And it’s one route of providing the return that early investors will eventually require – although it must be emphasized that the listing itself is not an exit, the next chapter in a company’s journey, and most of these investors will remain involved for at least the next 12-18 months.
But to gain the advantages, you first have to be able to meet the requirements. Becoming a public company demands a significant shift in your approach to building a business. Things that worked as a private company will not be accepted on the public markets. For example, a startup may set an over-ambitious target and be applauded by its board for reaching 95% of an almost impossible goal. Public investors are different and demand predictability: there’s no lenience for missing targets – a company must be able to confidently and accurately forecast its performance several quarters into the future.
”Ultimately, most fast-growing companies will know the point at which going public has become a good route for them.
This more structured approach to running a company requires the right people to lead it. Before going public, a company will need to make some well-chosen hires: a CFO who is as comfortable with explaining the business model to Wall Street investors as with running an effective finance department; board members with the experience to chair the audit and risk & compliance committees; and independent directors who will help to build the confidence of institutional investors. All these people need to be in place and settled at least a few quarters before the business goes public.
So to those companies who are asking themselves whether to seek a public listing, make sure you can answer the following questions: is your business model predictable and stable enough to build the confidence of public market investors; have you identified the strategic hires that will be needed to make your business a seaworthy public company; are you willing to accept the additional transparency and scrutiny involved?
Ultimately, most fast-growing companies will know the point at which going public has become a good route for them. They reach a tipping point at which being private starts to become a limitation, and being public would convey meaningful advantages, helping to enable future growth. But being ready is not the same as being prepared. A company can’t simply reach this inflection and press a button: they must have anticipated getting to that point and integrated the necessary people and structures in advance. Again, going public is not an exit: the first two years of trading are vital, and it’s essential that a company arrives on the public markets ready to hit the ground running.
”As a public company, there are no pit-stops and few opportunities for running repairs. So make absolutely sure your car is ready before you choose to put it on the grid.
To do so, think of your company like a racing car. These are tested not at medium speed, but at full throttle to put every component under stress and determine its viability. Only at maximum acceleration can you start to hear parts of the engine whining and the body creaking. These are the faults that need to be identified in testing – your final quarters as a private company – so they can be fixed before the race begins. As a public company, there are no pit stops and few opportunities for running repairs. So make absolutely sure your car is ready before you choose to put it on the grid.
This article is part of an article series on IPOs with Accel and Soaked by Slush. As a part of this project, we’re conducting a survey to take the temperature on European founders’ & operators’ sentiments on going public. If you have two minutes, your input would mean the world; your answers will be anonymous.