top of page

IPOs gone wrong! – Top 5 Lessons to Remember for Entrepreneurs

2019 was a disappointing year when it came to IPOs – we witnessed preposterous valuations, unicorns failing to live up to their hype and serious questions being raised about corporate governance in privately held companies. The likes of Uber and WeWork failing miserably while going public teaches us important lessons that one must remember before going public with their company.

Lesson #1: Valuation, valuation, valuation!

Public market investors have a very different view on valuation than private investors in funding rounds. While valuation of privately held companies depends on a variety of factors such as liquidation preferences and anti-dilution rights to investors, it is important for entrepreneurs to understand that public investors assess a company based on its actual financial performance and base valuations on metrics such as P/E ratio.

Take WeWork for instance; public investors wanted to value WeWork as low as US$10billion, down from its last private valuation of US$47billion. Similarly, when Uber launched its IPO, expectations of US$120billion valuation was slashed to US$76billion after the first day of trading. Hence, it is important for entrepreneurs to ensure that instead of racing to become a unicorn startup, they should take a long-term view of their business and ensure that they prudently value their company.

Lesson #2: Having a sound business model is crucial

When Venture Capitalists invest their money into new businesses, a lot of factors go into consideration including a charismatic founder’s vision and ability to tell an exciting business story. Growth-at-all-cost companies like WeWork, Uber and Lyft faced failures during their IPO process because they lacked a sound business model. Uber made a statement saying that it could probably never be profitable. WeWork’s revenue was climbing but it’s cashflows increasingly negative (by 2018 its earnings before interest, depreciation and taxes was a negative US$ 1.4billion).

It is important to remember that once public investors see through the hype and that the business model does not work, they will not invest their money. Building a model with defined revenue streams and having a clear path to profitability is essential.

Lesson #3: Making profits matter

Venture capitalists are willing to take bets on loss-making startups with the hope of a successful future, taking into consideration the company’s founder and team capabilities and product offering. However, public investors have very low patience with companies that have constant losses and high cash burns. Let’s take GoPro for instance. Unlike other growth-stage companies, GoPro was profitable before the IPO which led to a tremendous IPO success. Soon after, the company’s revenue growth slowed down and operating expenses were on the rise like never before, as a result it reported losses. Investors began losing confidence and the share price sunk by nearly 60% since it’s IPO. Public market investors are less forgiving about loss than private investors. It is important to establish consistent profitability margins and build a sound revenue model before going public.

Lesson #4: Need for a strong corporate governance structure from the start

Companies need to make a lot of disclosures in the Prospectus while filing an IPO, including disclosures on corporate governance and structure. More often than not, entrepreneurs do not pay much heed to establishing a corporate governance framework at the “startup” stage.

When WeWork filed its Prospectus, investors were alarmed by the related party disclosures made (which were more than 100!). Adam Neumann, CEO of WeWork was cited personally borrowing hundreds of millions of dollars from the Company and WeWork’s money was invested in several companies where he had vested interest.

Remember the basics right from the start of the business– do not mix personal and business expenses, ensure shareholder meetings are held regularly, document contracts, etc.

Lesson #5: IPO may not be the best choice for you

IPO offers Founders and Promoters of a privately held company a good opportunity to raise money to help the business grow. However, going public comes with its own set of risks and challenges. Public companies do not have the choice to select their investors. For a company looking for strategic advice from shareholders to grow, staying private makes more sense. Once you go public, you need to consistently deliver sound financial results – public investors are less forgiving about losses, and you have less chances to experiment with your product and make mistakes. Moreover, the IPO process can be time-consuming, expensive (Uber paid US$ 106 million to 29 Investment Banks for its IPO!) and attract unnecessary scrutiny towards the company. Companies like Spotify and Slack have used direct listing rather than IPO to enjoy the benefits of being publicly listed while avoiding the whole IPO process.

Ask yourself – “Is an IPO and going public the best choice for you now?”

18 views0 comments
bottom of page