8 things any company should consider before an IPO

Going public is a huge deal. An IPO allows for a huge round of financing that will hopefully allow a company to continue to invest in growth and become profitable or even more profitable than it already is. But what should CEOs of startups and other private companies consider when thinking about eventually going public? Last week I sat down with Scott Dussault, CFO/COO at Nasuni who’s seen multiple IPOs firsthand, and I picked his brain on what it takes to go public. Here’s what I learned.

Is an IPO feasible?   

The first thing any company should consider when thinking about an IPO is this: is an IPO even feasible? To determine the answer to that question, there are four criteria that must be satisfied in order for a company to be able to go public. If these criteria are met, then an IPO is feasible, and something a company can consider:

1. How big is the market? How fast can you grow? The bigger the market, the more money you can make. The more money you can make the faster you can grow. If your company has a huge market and room to grow, you’re a fourth of the way there.

2. How disruptive is your product? Is your product a new way of doing something? GOOD! The more disruptive your product the better. You want to stand out, you want to be new, and you want to change the way things are done.

3. How predictable is the business model? If you can accurately predict how you will do in the future, whether quarterly or yearly, you have a huge advantage. Public market investors love quality, predictable earnings. If you can prove to investors your company will succeed, investors will buy your story, but more importantly, your stock.

4. Finally, how much leverage do you have? Not debt leverage, but what gives your company leverage – i.e., a competitive advantage. What asset does your company control that lets it gain more leverage over rivals as you grow? If you’ve got a real advantage, then you have the final solution to the IPO equation. The more leverage you have or can create, the better.

Milestones, a necessity to meet

Meeting the above criteria is necessary, but not sufficient to be able to go public – these are table stakes that must be true, but after that, the company needs to perform against specific milestones. As an analogy, many sports teams have fielded talented players but failed on the execution, just look at England’s Golden Generation. Inconsistency and failure to meet performance objectives can mean the death of a potential IPO. Once an IPO has been deemed feasible, a company must hit these milestones, and not just once – consistency is key.     

1. Revenue must be meaningful. A company needs cash on hand. Cash is like oxygen. The more meaningful the revenue, the more oxygen. (assuming good margins that is; see the following points). We’re not talking revenue growth (yet), just the level of revenue must be substantial – the company needs to sell a lot of “stuff”.  

2. Are margins acceptable and/or headed in the right direction? Public market investors are ultimately buying streams of future earnings (think: cash) when they buy stocks – without margins headed in the right direction, the value of a public company’s equity can become suspect. Future profit and the potential for profit is what gives a stock its value.

3. Is a company growing at a steady rate? If it isn’t, the company is not stable, or there’s something wrong with the market, or both. A company that isn’t growing or growing inconsistently is not ready for an IPO.

4. Predictability. This is important both operationally and for investors. You’re going to want to know what to expect from your company, so will the shareholders.

When considering your startup’s IPO or an IPO for any company really, these eight points should be taken into account. Sure, they overlap in some areas, but what is more important is the differences between the feasibility and the milestones. While the criteria can be considered more of a thought experiment into the feasibility of an IPO, the milestones must be met in order to have the ability to go public. Not only must they be met, but they also must be met with consistency, and prove that a company can truly preform in a manner that will attract investors. Criteria and milestones – satisfy and hit these respectively and an IPO might be in your startup’s future.

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