Going public can help a growing company find a long-term path to success. However, it’s a ride full of ups and downs, and today’s market is not the same one we saw in 2020 and 2021. Here’s what you need to know if you plan on going public in the next two years.
In my career as a founder and investor in the financial sector, I’ve taken several companies public. These include CardConnect, Intermex, Paya, Payoneer and Perella Weinberg Partners. I’ve also co-founded investment firms and advised hundreds of fintech companies.
My experience has taught me that going public is often a better move for high-growth companies than turning to private equity or venture capital. This is especially true for companies that have an established market and strong vision. If you’re planning to go public within the next two years, this article is for you.
Thinking About Going Public? Here Are Two Reasons You Should
If you’re a high-growth company, there are two reasons why you should take your company public:
Using The Capital Markets To Grow
In private markets, companies that don’t break even have a harder time raising capital, more so in the post-2021 market. Compared to how they were, large private VC funding rounds are going to be few and far between.
For companies that have growth potential but aren’t yet cash flow positive, going public can actually be a great option—especially if you have a long-term vision and good unit economics. Having the ability to sell stock and create the cash you need can help you fulfill that vision. This is where being public becomes most beneficial.
Relying on private funding rounds can be risky. You could end up in a position where you need cash but have to sacrifice your valuation and a disproportionate amount of your ownership to get it. Many good companies that weren’t yet profitable were able to reach their growth goals because they went public at the right time.
Most high-growth companies look for ways to provide liquidity to their investors and employees. Going public can be a great option. Constituents can sell their stock for much lower transaction costs than the private market. Generally, in my experience, liquidating in the private market will have 10% higher transaction fees and stock will sell for 20% less than on the public markets.
Another aspect to consider is who your investors are and what they want. In a venture-backed company, your investors are going to be ra-ra supporters who want to grow the company by any means necessary. In private equity, your investors will want net cash flow at a high discount rate, with a focus on revenue over all else. These investors are somewhat akin to a master who can quickly turn on you and decide to sell the company whenever they want.
The public market provides a more stable, albeit more complicated, alternative. If you’re a public company, you need people who haven’t drunk the Kool-Aid to give you opinions and advice. The power of having many investors is that the only driving force is what the market wants—not the whims of a small group.
The other issue is when you’ve given out stock to many employees, you need a place for them to be able to sell their stock. If you’re a valuable growth company worth billions but have only raised hundreds of millions, you’ll need a large pool of investors to buy your stock. Otherwise, it won’t be worth billions anymore. Only going public can provide that.
The most important thing to do before going public is to build the best company you can, pure and simple. It’s even more important than meeting your investors’ expectations. Your investors may tell you to “grow revenue,” but does the way they’re telling you to do so make sense in the current market? You should always focus on product-market fit over short-term growth.
Give your market what it wants. If you’ve established a marketplace and a differentiator over your competition, lean into that and use it to increase your market share. For example, if you’re building a company that uses an advertising revenue model, lean into growing your audience. Make more of what people like and need, and don’t get distracted.
If you’ve identified a real opportunity and have a vision of how to fulfill it, the public market can help you get the cash you need, when you need it. Yet, it’s unlikely to be a straight-line journey to success.
In fact, going public is just one stage in the growth of a good company—often the starting line of a long race. It will be a journey full of many ups and downs and new, often more complicated, expectations to meet. Like private valuations, public valuations can also fall fast. We’ve seen this lately with companies such as Klarna falling from $45.6 billion to $6.7 billion in just one year.
Despite the long journey it takes to get there, most profits come to fruition in the public phase, not during an IPO. Facebook, Google, Apple, IBM and Ford are all good examples of this. A company worth building has a longer horizon for success. Companies that perform while growing with the public market are more likely to achieve the success they desire.
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms.