There are many logical reasons why unicorns choose an IPO — brand, talent, funding. But never underestimate the power of passion in a unicorn company’s decision-making.
Is an IPO the right strategic option?
Because the reasons for issuing an IPO can be as nuanced and varied as the unicorn companies themselves, it is hard to definitively measure the value of going public. If we were to look at it in purely economic terms, based on pricing and first-day performance, generally the answer would be yes.
Performance-wise, unicorn IPOs generally experience healthy first-day pops (the rise in share price from the opening to the closing bell on the first day of public trading – typically 15% to 30%).
Over the long term, success can be measured based on two factors: whether it realizes the initial personal objectives of the founder, and whether it creates value for the company’s stakeholders. The former is easy to measure. In terms of the latter, IPO investors will measure value creation based on the promises made at the time of the IPO, the effective use of IPO proceeds and the confidence and performance of management, which in turn determines stock price. Additional performance measures, such as an increase in brand recognition, improved attractiveness for talent or the achievement of stated growth rates, will also inform the perceived value of an IP.
Five tips that can help unicorns prepare for an IPO long before the opening bell
So, how can unicorn companies improve the likelihood that their choice of pursing an IPO is as successful as possible, regardless of reason? Here are five tips.
1. Start early and think strategically
Even though the median age of a unicorn at the time of its IPO is 8 to 10 years, many companies begin to think about their IPO strategy 3 years after founding. It’s never too early to think about transaction optionality at every point in the company’s evolution. In the early days, many companies are relying on friends and family, then an angel investor and then venture capital. However, once you reach the next level of funding, private equity, the company has reached a place where investors will want to see a return on their investment. The earlier a unicorn starts laying the foundation for the possibility of an acquisition or IPO, the better.
2. Stay flexible
It’s important to stay flexible when it comes to transaction options and timing, especially in unpredictable and more volatile markets. Getting IPO-ready 12 to 24 months pre-IPO, while multi-tracking to prepare for all options, allows the company to choose the time and approach that will net the company maximum advantage.
3. Invest in infrastructure, people and processes
It’s possibly one of the least sexy parts of building a business, but at a certain point, unicorns have to invest in infrastructure, people and processes to achieve IPO readiness and provide transaction optionality.
Founders often have alpha personalities, which propels them to operate at a speed at which few can keep up. Having the right people and processes in place will help the company, and the people who support it, maintain the pace the leader sets.
4. Hire the right advisors
Having the right people inside is critical, but a strong unicorn company also needs a network of advisors to help the company stay on track. Bankers, auditors, IPO-readiness advisors, lawyers and PR consultants can offer much-needed advice at pivotal points in the lead up to and follow-through of an IPO.
5. Consider enticing key investors for reference selling
Reputation and trust are everything, before, during and after an IPO. Welcoming a special type of investor can lend credibility to the unicorn, especially in the early years.
A unicorn company starts with the passion and dream of its founder. Through confidence, perseverance, determination and money, that dream grows from a home office, basement or garage, into a US$1b reality. Speed, timing, money, passion and a host of other drivers play a role in determining which funding route a unicorn company chooses. Regardless of the reason for pursuing an IPO, whether economic or personal, it’s never too early to prepare for the pivotal milestone founders dream of from day-one.
Over the long term, success can be measured based on two factors: whether it realizes the initial personal objectives of the founder, and whether it creates value for the company’s stakeholders.
The pros and cons of issuing an IPO
If we weigh the pros against the cons of issuing an IPO, there appears to be obvious merit in taking a unicorn public; however, doing so may have its pitfalls.
Pros
- Serves as a catalyst with speed and scale for accelerated growth
- Opens access to growth capital availability and a new external investor base
- Offers a liquid market for exits of initial investors, as well as further wealth creation and diversification
- Gives a boost to brand profile and allows the unicorn to open new markets and attract new customers
- Helps to retain great talent
- Provides stronger governance and transparency, allowing the company to improve its professionalism and credentialize itself as a bona fide market player
Cons
- Invites greater scrutiny through increased transparency and capital market regulation
- Creates susceptible to volatility in the markets, which can impact value
- Increases the burden on scarce resources to meet compliance requirements and regulatory oversight
- Places pressure on the company to deliver on promises in the public spotlight
Summary
Unicorn IPOs are on the rise as companies look to take advantage of a world currently flush with liquidity. Those who do make the strategic choice to go public have some best practices at their disposal to drive them toward success.