Five critical questions: Are you listing your startup too soon?
Tuesday, August 6, 2019/
Firstly, who am I to write this article?
I am the founder and chief executive officer of a private company, Verifier, that is now in scale-up mode, but has no immediate plans to list on the ASX.
This article is a result of our research and deliberations about whether to list and when. It soon morphed into a speech delivered to the members of the IPO Network — a group of advisors and experts who work collaboratively to support companies through the IPO journey.
For many startups, an IPO is a major milestone in hopefully an already successful journey. It enables startups to grow with access to the vast capital resource of share investors. The added transparency of listing makes it easier to sell to other listed companies, and certainly, in terms of attracting great staff, the liquidity of any stock options they are offered is very appealing. All in all, listing makes a lot of sense and is aspirational for a lot of startups.
However, it is not all beer and skittles.
Listing is very costly and distracts founders and senior executives for at least a year. The transparency is a double-edged sword, because successes get amplified but, likewise, failure (or loss of material clients) cannot be hidden. The liquidity can be great for early-stage investors, but if the stock isn’t actively traded, then the promise of liquidity quickly vanishes, leaving founders and their boards handling tough questions from the media and their retail investors. Not to mention that lack of volume being traded leads to abrupt shifts in the share price which leaves the company vulnerable.
So, if you have always dreamed of listing your business, here are some questions to ask yourself to make sure you are pursuing the right path, for the right reasons.
1. Have you considered other funding options?
We all get anchored to ideas and trending world views.
Probably the best reason to hit pause with a listing is that you haven’t weighed up all the options available to you. IPO advisors talk of founders walking into their office asking, ‘how do I list?’ not ‘should I list?’
You can only get the right input if you ask the right questions from the right people.
Raising equity is only one of many options. Private companies like SAS prove that you can earn billions of dollars of revenue and never be listed.
But don’t forget smart debtor line management. Would your clients prepay for a discount? Can you shorten debtor days? Then there is trade finance, debt in general, and private equity and venture capital.
2. Is this good for the company, or just the early-stage investors?
If a listing works, it will add strategic value to the business being listed. One advisory I spoke to has a hunch that over 70% of the unsuccessful IPOs had a lot to do with listings happening to create liquidity events for early-stage investors, rather than for value to the business.
Upfront I mentioned the value listing can bring in terms of making it easier for large, listed corporations to do business with you and for staff to join you.
It can also make other types of funding easier — for instance, debt funding. Lenders also find your heightened transparency appealing. Which means, again, that listing needs to be viewed in the context of your overall funding strategy.
3. Have you given yourself enough time?
The advice we got in doing our homework was that it’s much smarter, more time-efficient and cheaper to plan for a listing at least three years ahead of time.
That way, your books can be audited and prepared properly, and you ease yourself into it. Currently, the ASX requires a minimum of three years of audited accounts. It’s a lot harder to do that retrospectively.
4. Is the ASX the right exchange for you?
It is probably self-evident that if you are based in Australia, it’s easier for investors locally to evaluate you. That would make the ASX a good choice.
However, it’s worth pausing on this one.
There are examples of overseas companies choosing to list here in the fintech space because, as with Afterpay and Zip, we have a track record of understanding digital lay-buy better than other markets.
However, if you were founded here but saw all your growth coming out of a particular market — Europe comes to mind — you might want to spend the extra time and cost to list there. Or, likewise, if you thought investors there more appreciative of your proposition.
5. Am I the right person to lead in a post-IPO world?
The skills required to be an ASX listed chief executive are very different from those required to get a company to the point of listing. If nothing else, ASX-listed chief executives need to handle all the governance and reporting and public scrutiny their roles entail.
Not every founder or early-stage executive is comfortable, or equipped, for that. You may well be the exception to the rule, but at any rate, some time for self-reflection is needed.
In the talk I delivered to the IPO Network and their guests recently, the sense in the room was that founders are not managed well at an HR level.
So, if you are a chief executive on the verge of listing, make sure you take some time out with trusted advisors to chart your career post-IPO. If you don’t think it makes sense for you to be chief executive afterwards, start recruiting early. And if you do want to lead, then make sure you know what you are getting in to.
Most of all, make sure you don’t end up with a post-IPO career hangover.
Take the time to reflect — it’s worth it
Now, some final words of advice, and for this, I am going to draw on history.
The whole point of the stock markets of the world is to support risky ventures by enabling a vast pool of small investors to share both the upside and the downside — starting with the Dutch East India Trading Company in 1602.
Australia, because of its vast superannuation savings and their preference for listed equities, has significant potential to similarly support new industries that benefit Australia for generations to come.
If you find these questions of use and use them to chart your path to a successful IPO, you create a virtuous loop where stock market investors will be more comfortable to participate in IPOs and that in turn makes it easier to list.
So, take the time to reflect and make sure you list for the right reasons, at the right time. For all our sakes!
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