Post written by
Growth advisor at 500 Startups, Plug and Play Tech Center and Techstars. Best-selling author and The Oracles member. Startup Growth Mode
Many of the startups I have worked with started from scratch and didn’t have a plan to move forward with their IPO journeys. CEOs would often ask me how they could get from where they were to an IPO. By building a plan and continuously moving forward, they were able to achieve their goals. Now, I’d like to share with you the exact steps they took to get to an IPO:
Choose an underwriting group.
The first step is to ensure that you have management, tools and a process in place to support an IPO. Once your startup has all of these elements, you can go about selecting a group of investment banks that will support the IPO process. These investment banks are known as “underwriters.”
The process of interviewing banks and picking one that will lead the IPO and underwriting process is called a “bake-off” in the startup world. This is a competitive process and depends largely on the group of banks that dominate your industry, which might include Goldman Sachs, Morgan Stanley and other credible sources.
One thing I have noticed is that many startups want to get as many investors as they can in the door to support their stock when they go public. When you are looking at banks, try to find one that already has a network of investors and can bring value to your startup through its connections.
Have the first of many organizational meetings.
This initial meeting will draw the line for meetings to follow: financial, legal and commercial. I call this the “grand meeting.” It will help ensure the sustainability of the business as you prepare for the IPO. Remember, investors are doing their own due diligence to make sure your management team is ready for the company to go public.
In my experience, the grand meeting is an all-day event. Essentially, it is a brain dump of how you see the company in the years after the IPO process ends. We go through everything from future employees, departments, revenue models and innovative moves to come. Also, in this meeting, I recommend making sure you have a strong equity story and setting investor expectations for the future.
File the SEC statement.
After the team players for the IPO are finalized – this includes lawyers, accountants and investment banks — draft the S-1. This is a registration form that is required by the Securities and Exchange Commission. I’ve viewed many of these documents, and the simplified version is that it tells the world about your business model, your company’s plan to make it big, its competition and corporate governance. The SEC basically wants all the information it can get to ensure investors are making a wise decision around their investment. The SEC will look at this document, review it and send it back with any amendments.
During this stage, I also built out many different “road shows” -- in other words, marketing stunts that would drive investors to buy more shares when the IPO launched. I drafted video presentations to persuade investors why it would be worthwhile.
During this time, you will want to decide where you want the IPO to be held, either on the NYSE or Nasdaq. This requires filing with the exchange because they may have certain prerequisites before listing the company.
Host a series of marketing meetings.
After you receive the final review back from the SEC and the underwriters have done their due diligence, it’s time to move forward with a series of meetings that will increase interest around the shares. This process usually takes two weeks and the investment bank is involved, as it plays a large part when it comes to promotion of the IPO. The capital markets group will help engage investors and find out the value they would like to pay per share. Then the group will come up with the final price.
One of the biggest challenges for a startup is engaging investor interest. Everything is about presenting your compelling equity story at the right time. In my experience, it’s difficult to know the right value per share and the right timing, but the compelling story starts with your team.
Price the shares.
The banks typically look at several different factors that include: present value of the cash flow, the value of the company in relation to sales of the company and other competition based on competitor interest. The investors and the banks come up with a price and the number of shares to sell, and then the SEC approves it. There are three steps of the process after that: The underwriters have a chance to purchase the shares, then the investors and then anyone listed on the public exchange. The price sold to the investors could be different than the price sold on the exchange.
Get on the exchange.
The IPO kicks off with a small discount for investors who are interested in purchasing first because they are bearing the most risk. The chosen price will ensure that the supply and demand of the stock is well balanced. Once the stock is out, the designated market maker will ensure its stabilization and prepare it for trading in larger ways. This whole process is called price discovery.
With the two startups I have worked with, the price was able to stabilize and correct itself after 11 minutes. Then, the underwriters typically conduct research 25-30 days after launching the IPO.
This is a simplified version of what it really takes to go IPO. It may sound easy, but it’s a long process. Good luck!