7 factors that determine the success of an IPO

An Initial Public Offering (IPO) is a process through which private companies let the public invest and be a part of their growth through share sales. It changes a company's status from private to public, and is of significant importance for a founder.

An IPO not only allows companies access to capital and growth opportunities but also increases the interest of investors by creating an opportunity for them to gain high returns on investments. 

However, doing an IPO isn’t really as simple as it might sound. It requires a thorough understanding of the process, deep analysis of the company's financials, as well as doing preparations beforehand in order to ensure a successful and smooth transition. 

Let’s have a look at these seven key insights that should be taken into consideration before an IPO. 

Company readiness

The first and the most essential insight you need is understanding whether your company is ready for an IPO. This includes analysing the financial health, stability, and scalability of the business. 

It’s the founder’s responsibility to ensure that the company's finances are in order and that the internal processes are strong enough to survive the increased scrutiny associated with a public company.

Market timing

A poorly timed IPO can create unforeseen challenges. Unfavourable financial markets during the expected issuance date can adversely impact the company's debut on the bourses. Any attempt to go public while there is volatility in the market or during economic downturns can turn risky.  

Hence, it becomes extremely crucial to closely monitor the market and overall economic conditions. IPO often performs well in bull markets (a market in which share prices are rising, encouraging buying). 

Legal and regulatory compliance

Founders must be well-versed with the legal requirements associated with going public, for example, compliance with Securities and Exchange Commission (SEC) regulations, preparing detailed financial disclosures and ensuring that corporate governance practices meet public company standards.

(Corporate governance consists of rules, practices, and processes used to direct and control a company.)

Valuation and pricing

Overpricing can lead to a fall in investing interest whereas underpricing will make you miss the opportunities to raise capital.

Hence, a balance between the both is a must. Adhering to fair valuation and pricing will ensure the success of an IPO. 

Investor relations

Investor relations (IR) is about spreading key information that allows investors to decide whether a company is a good enough investment for their needs or not. It also makes sure that the public stocks of the company are getting fairly traded.

Hence, an IR strategy that assures transparency is essential in maintaining a positive relationship with shareholders and analysts, after the IPO process.

Exit strategy and lock-in period

Founders must have a clear exit strategy in mind, which involves deciding whether the plan is to immediately sell the shares or wait for an extended period, after the IPO. 

Many IPOs follow the lock-up period agreement, which restricts the selling for a certain period, typically six months. Therefore, careful evaluation of the associated terms of the agreement is a must in order to ensure its alignment with the exit strategy. 

Company’s branding

A company’s influence in the market and its branding play a significant role in the IPO’s success as it attracts interest from investors, which, in turn, results in a higher valuation. 

Therefore, building a positive brand image is of utmost priority that not only resonates with investors but with the public as well. 

Conclusion

Transitioning a company's status from private to public through an IPO is a defining step that requires careful analysis and preparation.

As Warren Buffett once wisely said, "It takes 20 years to build a reputation and five minutes to ruin it." The same principle applies to IPOs—meticulous preparation is key. A thorough assessment of the above-mentioned factors will ensure long-term success.