This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.
To coincide with the 20th anniversary of the London Stock Exchange’s AIM, international law firm Olswang has composed a compendium of articles that highlight AIM’s ascent in becoming a hugely successful small cap marketplace and how companies and global sectors have grown as a result. From the explosive growth of technology and retail companies listed on AIM to thousands of both domestic and international company IPOs, Olswang’s Future of AIM series examines the past, present and future of companies listed and looking to float on this rapidly growing marketplace.
Last year was an exciting year for tech IPOs, but investors have been more cautious in 2015. In this chillier climate, it is important for high-growth technology businesses to manage both the IPO process and expectations carefully. Here are our top 10 tips for technology businesses with their eyes on the IPO prize.
- Timing is everything
Many great businesses have failed to IPO because the timing wasn’t right. In our view, it is better to put plans on hold until wider market conditions improve than to announce your intention to float and backtrack when you find that investors aren’t willing to take on risk in the current environment.
- Preparation, preparation, preparation
An IPO is time consuming and drains resources: it’s the black hole of transactions. Every step you can take to prepare for an IPO, no matter how small, is a step worth taking. In any event, most preparation also makes good business sense.
Spend time early on putting in place processes to retain complete copies of important documents centrally; work with your accountants to implement robust financial reporting procedures and good working capital management; rationalise your business structure; and maintain up to date contact details for all your shareholders and option holders, particularly important for technology companies that have been through multiple funding rounds. The aim is for your pre-listed company to behave and operate like a public company before it is one.
- Your financials need to tell the story
Although your proposition might be so compelling that profit generation is not essential prior to IPO, your financials need to show a strong track record of growth. The narrative in your prospectus document and forward looking strategy are important, but investors will still spend hours poring over your financials before deciding to invest, so make sure yours tell a compelling story.
- Management team selection
Investors in high growth companies place more emphasis on the management team than in more established businesses. Appoint your chairman and other non-executive directors early so they have time to get to know the business and can add value – they are often the members of the board with the most public company experience and their potential contribution is often overlooked. When making the appointments, work out the weaknesses of your executive team and use the non-executive directors to fill those gaps, looking outside the narrow pool of career NEDs.
- Engage your advisers and use them wisely
Experienced advisers (nominated advisors, brokers, accountants and lawyers) are essential to a smooth process. Spend time finding the right advisers for your business, not just the ones who promise to raise the most money or get you to market the quickest. It helps if you like them – after all, at the busiest point, you will be spending far more time with them than your family and friends.
The investor roadshow is a crucial part of the IPO process, requiring the management team to “sell” the business face to face with investors. Appoint investor relations and corporate PR early to raise the visibility of the CEO and CFO and build their confidence under investor interrogation.
- Where there is opportunity, there is also challenge
In 2014, the most exciting tech businesses were those disrupting traditional business models. But with opportunity (and exposure) also comes legal challenge. Disruptors such as Google, Uber and AirBnB have all been subject to extensive legal challenges in the last year, and, without resolution, similar challenges to your business will have an effect on IPO valuation.
- The IPO process is a harsh mistress
One of the most testing aspects of a floatation is that it takes the time and attention of the CEO and CFO away from the business. You need strength and depth in the wider management team to counter this shift in focus. Any drop in the underlying performance of the business could derail the entire process.
- Don’t announce your plans too early
Confidentiality can be hard to maintain, particularly as the transaction team grows. If the timing isn’t right and you put the process on hold, you don’t want your IPO story to be old news when it finally does happen. Good and early preparation (see tip 2 above) should mean that you can involve the minimum number of people in the early stages of the process, thereby keeping the circle of trust tight for as long as possible.
- Beware the curse of private fundraisings
Venture capital and private equity are hot for high growth technology companies at the moment, leading to sky-high valuations of private companies. Such is the phenomena that businesses with a valuation of more than $1 billion have their own nomenclature – unicorns. Companies are taking longer to go public and in many ways private investment firms are performing the role the public markets once did, providing growth equity. The disadvantage of achieving unicorn status is that some of these unicorns may have outgrown the public markets before they announce their intention to list. Therefore if an IPO is your intended end game, leave yourself room to continue to grow after you join the market.
- The IPO is only the beginning
Finally, successfully IPOing a business is a substantial achievement, but it’s only the beginning of the journey. Be clear about why you are going public. If it’s only to realise value for existing shareholders, then a trade sale may be an easier, faster and safer bet. Capital markets require a long term strategy, and investors are only going to stay interested in keeping their money with you if you invest it wisely and maintain the share price.
Also read about how international companies’ presence is growing on AIM in the previous article in Olswang's Future of AIM series.