Saltire Capital Partners Insight Series: Six common pitfalls on the path to an IPO
Australian start-ups often face a particular funding conundrum. Locally, there aren’t huge capital reserves for early-stage companies to access as there are in other places, such as Silicon Valley. The Australian venture capital market is still emerging and populated by generalist firms, who shy away from specialist investment opportunities. Banks are wary of approving loans for early-stage companies because of the perceived elevated risk.
For many early-stage Australian companies, an initial public offering (IPO) is the funding answer. The opportunity “to list” can provide private companies a lucrative opportunity to fund growth, access liquidity, and offer shareholders an opportunity to exit. The IPO goal gives teams a clear vision to focus effort, executives a crisp story to tell, and investors an opportunity for a return.
Nick Armstrong is a FinTech, RegTech and CleanTech entrepreneur with close to twenty years’ experience raising capital. In his career, Nick has completed over 25 funding rounds and took one company from inception to IPO in just four years. Armstrong says,
“An IPO gives start-up companies a great strategic option to fund growth and give liquidity to early investors, but careful preparation is critical. Leaders planning an IPO must take time to educate themselves on what’s involved. Taking a company public can be a gruelling, expensive, distracting process with an unforgiving audience of external stakeholders and strict regulatory oversight by ASX and ASIC.”
Preparing for an IPO is a time-consuming, costly, but critical process to get right if listing is your goal. Drawing on his personal experience, Armstrong shares six pitfalls for early-stage companies considering an IPO:
A simple, clear message
Investors and customers must be able to understand what your company does in one or two sentences. If investors and customers don’t understand what the company does, they won’t invest or purchase. If you need graphs, slides, an expert, or an hour to explain your value proposition, it’s too complex. Be ready to explain what your company does in 13 words or less.
Accounts, systems, and processes
The Australian Stock Exchange (ASX) and the Australian Securities and Investments Commission (ASIC) have strict requirements for companies preparing for an IPO. Your company must meet minimum admission criteria, including structure, size, free float, and the number of shareholders. Your company must also have the accounts, systems, and processes in place to operate as a public company, before going public, to meet all compliance and governance requirements from the first day of operation. Lack of the right infrastructure and processes before an IPO compromises the likelihood your company will survive regulatory scrutiny by the ASX and ASIC.
A recent Deloitte poll of 3,000 executives showed one-third of executives view timing the market as the biggest concern when considering an IPO. Advisors often talk about the market “windows” for an IPO. That is, when the market conditions are ideal for an IPO to maximise the company’s valuation. The ideal window to launch an IPO is when the market is ready, and your company is too. How do you know when that is? Analyse the volatility index, industry performance, the competitive landscape and speak with your trusted advisor team. When the timing is right, don’t hesitate to action the IPO.
You’re likely an expert in leading your organisation but be aware that a successful IPO demands specialist expertise, which may not exist inside your team. It’s critical to identify a team of best-in-class trustworthy advisors, including lawyers, accountants, underwriters, and independent specialist IPO advisors. If you don’t know great advisors, use referrals. Make the time to research each advisor’s reputation, market and business experience, success with previous IPOs, team quality, potential conflicts of interest, and personal chemistry with you. Armstrong says,
“Many advisors will promise to show you a pathway of gold to a shimmering rainbow of success but only a few have the right skills to walk with you the whole way through an IPO.”
When a business evolves from a private company into a publicly traded company, a significant cultural shift happens. The governance and accountability of running a public company forces change across systems, processes, rules, technology, teams, and more, demanding different skills and experience from the executive team. Sometimes the executive team won’t have what it takes to run a public company. Sometimes the team won’t want to make that transition. Investors want to invest in companies with steady, capable executive teams they can trust to lead the company into the future. Armstrong says,
“Make sure the executive team is on board with the direction the company is going. The CEO is the hierarchical leader, but the executive team runs the company day-to-day. Have the IPO conversation with your leadership team early to secure commitment and to identify if changes are needed. When the executive team is aligned on the company’s strategic direction, the CEO and CFO need to meet with investors a year or two before the IPO to build relationships and trust.”
Atlassian is one of only a handful of Australian start-ups that remained founder-led post-IPO. A far more typical pattern is for CEOs to choose to give up control. Or have it taken from them. A Harvard Business Review study of early-stage companies found that after three years, 50 percent of founders were no longer the CEO, and less than 25 percent were the CEO during the company’s IPO. Armstrong says,
“CEOs must understand the strategies and trade-offs to maintain or relinquish majority ownership or management control on either side of an IPO if they want to remain in the role of CEO. A founder CEO with the passion to create and launch a business must draw on different skills to run a public company. That shift can make the role of CEO less appealing.”
IPOs are an excellent vehicle for certain early-stage companies at particular stages of development to fund growth, but there are many factors to consider to set the stage for success.
The executives at Saltire Capital Partners have advised on multiple IPOs over the last 20 years. We have the experience, connections, and specialist expertise to guide companies around common IPO pitfalls.