Ingredients That Make for a Good IPO

A company that is on the path to an IPO often has a number of goals in mind. The most important one would be to raise money, but there are many other goals that must be accomplished before this can happen. A company needs to make sure their business model is sound and is ready to scale, they need sufficient financing to execute the plan, they must have a strong management team with a long-term vision, and they need investor confidence. While many companies meeting all these requirements still fail to successfully go public, our article will focus more on what not to do when going about an IPO. We will look at some common mistakes made by start-ups when looking for investors or planning their impending stock market debut. These are things that not only waste time and resources but may end up costing the company its hard-earned credibility. As an entrepreneur, you might as well want to know about the pro rata.

Some common mistakes to avoid include:

Not having a sound business model at the outset

Successfully going public is much harder for start-ups than established companies with proven track records because investors are less willing to take risks on unproven businesses. Thus it becomes exceptionally crucial for an IPO applicant to have a solid business model which is future-proofed by significant growth opportunities. If you are unable to show this, then the possibility of success will decrease significantly even if you do everything else right. However, proving your worth as a company might be easier said than done, especially in light of cuts in technology spending and the recent economic crisis which has made it difficult for companies to obtain growth capital.

Not having a large enough share of your target market

Companies often face the problem of failing to achieve economies of scale and thus increasing their cost structure beyond what is financially feasible. For this reason, there is an inherent risk in joining a crowded industry where costs of customer acquisitions and product technologies increase exponentially, while pricing power decreases. Thus, investors must be convinced that consumers will purchase your product at a price point better than your competitors if they believe that you can successfully execute your growth plan. You need to convince them that you hold an advantaged position with respect to customers or technology before they will commit significant funds to your business model.

In order to do so, you must have a clear understanding of your target market and be able to define why your particular product will capture an advantage over the competition.

Having only sporadic sales records

Of course, not every company is going to look like Facebook or Twitter on paper, but their sales record should show some substantial growth that investors can base their projections on. If all you have are a few months of sales records then there is no way for investors to calculate future revenue streams with any degree of confidence which does not bode well at all for the IPO process unless you can validate your assumptions with strong support from the industry experts or past customers. Thus if possible, try to obtain as much history as possible showing growing revenue, which is always more convincing than a flat line.

Not having the right management team in place

Successfully going public takes vision and an understanding of how to execute that vision. To do this you need people who are committed to the company’s success, have the strong financial acumen, and can build sustainable business models. You also need employees who know how to sell your product or service because without sales there will be no revenue. A company needs competent managers at every level if they hope to convince investors that their long-term prospects for growth are promising enough to qualify them for an IPO.

Having experienced executives with long records of relevant experience in growing companies is vital when trying to convince investors that you have what it takes to succeed.

Ingredients That Make for a Good IPO

Not hiring the right legal and accounting advisors

Legal and accounting advisors are extremely important during the IPO process because they will help you avoid serious pitfalls that can potentially stop or slow down your registration. You should hire lawyers who specialize in initial public offerings because they understand what regulators will be looking for when reviewing your submission. They should also have experience with small companies which is crucial if you don’t want to spend too much time preparing documents (which investors do not like).

Not having enough revenue

This is one of the most common reasons for IPO rejections. The SEC requires that you have at least three years of audited financial statements before you can go public. This means that if you are a startup, your company will need to spend a considerable amount on accounting expenses if they want to be in line with these requirements.

Having revenue forecasts after the first year may sound promising but it’s not enough because investors are looking for companies who can sustain themselves without raising additional capital or incurring any debt which makes sense considering all the risks involved in investing in startups. For this reason, management needs to have realistic projections about how much money they will bring in and when they plan on doing it.

Not having a well thought out growth strategy

This ties in directly with the second point about management because for them to accurately forecast sales they need to know that their company will be able to handle an increase in production capacity without running into any logistical problems. If the company is growing too fast then there are also concerns about whether or not they can hire employees who have the right skills for the job, which will affect how much revenue the business brings in during its early stages.

Not having enough audited financial statements

As previously mentioned, the SEC requires that a company pass audits before it will be able to go public. This means that even if you would like to save money on accounting expenses you shouldn’t do things like merging with another business because it could render all of your previous audits invalid and push back your IPO date. You should also avoid fudging numbers or making any misrepresentations about how much money you have in the bank (or don’t). A positive bank balance definitely helps but not as much as real evidence of profitability which is crucial for convincing investors that your business is viable.