There are a lot of reasons 2018 could be a mixed year for Initial Public Offerings in the U.S. While the total number of IPOs in recent years is well below the turn-of-the-century dot.com boom, it's up from the tech collapse and subsequent global financial crisis. The run up in the public markets and the dramatic lowering of corporate tax rates is helping balance sheets. Valuations are high. IPO markets are off to a good start, but there are headwinds facing those considering an IPO: A new Federal Reserve chairman is poised to push a more aggressive schedule of interest rate hikes, it's a midterm election year, and there's been a lot of volatility in the markets.
So it's important that any executive thinking about ringing the opening bell on a public exchange, whether this year or down the road, do the groundwork it takes to make an IPO successful in the long run. Think of it as the difference between starting a race strong and finishing first. You want both but the latter takes work, pacing, strategy and, above all, execution.
That's what we find over and over again in our work advising companies -- and in examining the data from those that have gone public in many industries. We've analyzed not only how companies perform at the time of their offering but also over the next few years -- and we've found that like the tortoise and the hare, the race goes to the steady. The strongest performers were companies that had a great plan for an IPO, including a growth story that could be executed, strong leadership, and solid infrastructure to support future growth.
So it's worth thinking about why you want to go public, and to remember that an IPO is a means to an end: The goal is to grow an amazing company over time, not just have a spectacular launch.
It used to be that IPOs were an essential way to raise capital -- and they're still great for that. But today there's lots of financing available, especially so-called late-stage capital, which comes even after a company has grown dramatically and has a large valuation. There's money to be had from familiar sources like venture capital and private equity firms -- and there's more of it. In 2006, $31.2 billion of venture capital money funded 2,888 private U.S. companies, according to EY. In 2015, $77.3 billion went into 4,244 companies. But there are also a slew of new sources available for financing -- including sovereign wealth funds, corporate venture funds, and a range of financial institutions around the globe that can allow a company to be awash in investments before it goes public.
That didn't used to be the case. The runway to an IPO was shorter and companies went public with lower valuations and smaller sticker prices. Today, it's common for companies to have much larger valuations before their shares are put on public exchanges. There's no reason to rush to public-equity markets just to get financing when there's a whole ecosystem of ways to get capital.
But even if capital is readily available elsewhere, there are still plenty of reasons to go public when the time is right for the company. One of the most important is that an IPO can be an essential tool for hiring and retaining top talent. To recruit the best people, you'll likely want to offer them equity in something where there's liquidity, and where they can actually cash out and get value. Over time, you're likely to conclude you need the size, branding, and reputation that comes from being publicly traded.
So what do you need to have an IPO -- and a great company?
First, you need a leadership team that's ready for the intense scrutiny that comes with an IPO, scrutiny that comes from the public, investors, and financial regulators. You want to have a solid board of directors, including people who have served on the boards of publicly traded companies. You need breadth and depth of industry experience, with an understanding of high-growth companies. Ideally, you will need a management team with public-company experience. You want a team that'll be successful in five years, not just now. You want to keep your company's entrepreneurial spirit alive but you also need to be able to have systems and controls in place so that you can tell a predictable growth story, which is what markets demand.
And then you need to make it happen. That means you need a top-notch legal department to handle regulatory and compliance issues that come with close examination by federal and state regulators. You need superb investor relations and marketing departments that can manage investors' expectations about growth. You need the right kind of controls in place, including risk management. Sometimes, holding back on a new product or location can be the right move, because you want to have confidence an expansion will work and to tell the right story to investors. You want to be able to tell a predictable growth story.
The aspiring public-company CEO needs to know it's not enough to have a great concept; you need to be able to have a long-term plan and make it work. Over the years, we've seen IPO valuations plummet because new public companies were unable to produce reliable forecasts and meet investor expectations. Some of these have been business-to-consumer (B-to-C) enterprises, which operate with a dynamic and often unpredictable customer base. Founders who are thinking of taking their companies public can look to the many businesses that started out as B-to-C, but then found an even more reliable path forward by refocusing their companies on the steadier, more predictable revenue streams that come with business-to-business sales.
Every company has its own growth story and every company has to come up with its own plan for an IPO. It's great to be a "unicorn," or a startup with a valuation of over $1 billion. But the majority of companies that go public will not be unicorns. So don't get caught up in pre-IPO stock price. Instead, get the fundamentals right and the rest will follow. Be the tortoise, not the hare.