📈 What does it take to go public today?

Hi there,

Vieje here again. Hopefully you can all read this after the solar eclipse on Monday. We didn’t get a great view in San Francisco, but I’m glad I can say that I saw one. Maybe I’ll write a newsletter again when the next one hits in 20 years. /remind me solar eclipse in August 2044

It’s been an energetic few weeks. My colleague John wrote about the Reddit IPO in our last newsletter and we’re all anxiously waiting for the next wave of companies to file or update their S1s and start the process of going public. We expect at least a handful to file in Q2 and aim to go public before the election heats up. 

We’ve spoken with many people at late stage companies and all of them are wondering when it’ll be their turn to ring the bell at the stock exchange. So today, I wanted to write about what we feel it takes for a company to do an IPO in today’s market.

For this topic, I’m bringing on our COO and former JPMorgan investment banker, Jaime Moreno de los Rios, for his insights. Let’s jump in.

❓First, why do companies decide to go public?

Accessing the public markets is an important step in a company’s journey that only a few can take. The reasons why companies go public may be:

• To raise capital: This influx of cash can fuel growth, fund new products, or even help in acquiring other companies. It’s usually a much quicker process to raise capital in the public markets than it is in a private company funding round.
• Marketing: Being listed on a stock exchange catapults the company into another stratosphere… it’s not about bragging; it’s about attracting top talent, bringing more customers, and even intimidating competitors.
• To pass the baton: Going public provides early investors and the hardworking employees holding stock options, the opportunity to cash out some or all of their shares and pass the baton to another set of investors focused on liquid public stocks. For many, this moment is the big payoff for all the late nights and caffeine-fueled coding sessions.

❔What does it take to go public?

Going public is a long process, often several years. Companies need the following:

• Financial performance: the right combination of scale, growth, a clear path to profitability, and in this market, if you have credible AI story to tell, that’s clearly a bonus
• Top management team: a strong C-suite as well as a CFO that runs a tight ship, and who ideally has gone through this rodeo before
• Proper reporting and controls: Companies need to have audited financials and robust internal controls to pass through the underwriting process and convince investors to buy stock
• Underwriters and advisors: a company will pick several investment banks to help in the IPO process as well as Legal and financial advisors to help navigate all the complexities of an IPO

As you can imagine this takes years. Once you’ve done the hard part of building a business that can feasibly go public, it takes about 9 months to select the bankers and lawyers and do all the work that ends with ringing a bell (at the New York Stock Exchange) or pushing a button (if you do it at the Nasdaq)

Ah… and let’s not forget…you need the right market conditions.

The markets have changed significantly in the last couple years. During the ZIRP years and especially in 2021, it felt like tech companies were going public via IPO, direct listing, or a SPAC almost every day. While this sounds crazy, the dot-com era was arguably even nuttier, companies were going public prior to even generating a dollar of revenue!

Column chart showing global IPO activity by number of IPOs from 2020 - Q1 2024. Complete data is as follows: 2020: 1,452; 2021: 2,436; 2022: 1,415; 2023: 1,351; Q1 2024: 287.

Source: E&Y https://www.ey.com/en_gl/insights/ipo/trends

Of course, markets change. Nowadays, investors are demanding much more of companies and bankers are advising their companies accordingly. In short, the bar to do an IPO in 2024 is much higher.

❔How much scale does a company need?

In this market, you need appropriate scale in order to have a successful IPO.

“After the frenzy we saw in 2020 and 2021, the markets (i.e. investors) have become a lot more stringent in who gets to go. Back then companies with $100M of revenue were able to go out. Today, we’re seeing that companies need at least $300M in revenue, and when you look at Klaviyo, Instacart, Arm, Reddit, they all have north of $500M. Astera Labs was a recent exception… but that one has a lot of AI pixie dust on it” -Jaime

📈 How much growth does a company need?

Investors purchase stock for potential upside and a lot of that hinges on the growth potential of a company.

“Growth needs to be considered in conjunction with scale, but assuming that you’re at scale with $300M in revenue, you probably also need 30% annual growth to successfully go public in today’s market”. -Jaime

❤️ What else?

Of course revenue and growth are probably the two metrics that get looked at the most. But those aren’t the only two metrics.

“In the current climate, the emphasis has shifted significantly towards profitability. At least being breakeven or having a clear path to profitability are critical today, as investors are over the grow-at-all-cost mentality. They want profitable growth.” -Jaime

Current trends in the tech market can also prop a company’s IPO prospects up.

“Today, we’re seeing that anything that is tangibly related with AI immediately sparks investors' appetite, reflecting a growing recognition of AI’s transformative potential across industries and the growth that it could come with it.” -Jaime

The unfortunate downside to the post 2020 and 2021 world is that a lot of companies that were planning on going public in 2022 are going to have to wait longer or turn to M&A for their exit. The requirements to go public have changed and unfortunately a lot of companies that were preparing to go public in 2022 need time to shift their strategies to the new reality so they are appealing to investors in the current environment. You only go public once, and the last thing you want is a forced IPO that is poorly received.

This is of course a simplified and high level view into the complex world of startups and IPOs. If your company isn’t meeting one or any of the criteria, fear not, as markets can change and companies do a lot of work in the run up to IPO in order to be appealing when time comes.

If your company is pre-IPO and you want to chat more, just reply to this message and we’ll be more than happy to chat!

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