Going public is a great accomplishment, but the process is time-consuming and complex. We have seen several corporations who have been fortunate and unfortunate to go through the IPO process and then being public trading companies.
The astounding aspect I have observed is that IPOs blow up frequently within the first quarter of their public life. This occurs so frequently that a small group of investors has made a living by investing in these faulty initial public offerings (IPOs). Why?
Because they are aware that a failed IPO does not inevitably indicate a failed business. The difficulty, of course, is that it takes a tremendous amount of work, credibility rebuilding, energy, and time to regain lost valuation and win back the faith once a newly priced IPO blows up, and the stock collapses to a point where it is judged broken.
So here we will unveil some prime reasons for IPO pitfalls and suggestions to avoid them. Let's begin!
1. Lack of Planning
Problems during an IPO are frequently caused by inadequate planning, even though some executives might believe that planning starts with an organizational meeting six months before an IPO.
However, initial preparation must start two years earlier. Sometimes the IPO procedures depend upon the scope and growth of organizational changes. Thus proper preparation matters a lot in making your IPO successful.
Even well-established organizations should not underestimate the time needed to prepare for an IPO.
Companies are much more likely to face substantial obstacles on the way to an IPO without thorough planning. The following elements can help you in making a plan before going for the IPO:
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Building the Team
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Preparing Financial Statements
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Drafting S-1
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Closing the Books
With this, you should also check all the factors before investing in IPO, as it would save time and make your potential investments more fruitful.
2. Paying Attention to Gray Market
However, let's not lose sight of the fact that the gray market is ultimately an informal process. It may be valuable for determining interest levels and prospective listing pricing.
When markets are stable, it operates efficiently, but when secondary markets experience increasing volatility, it tends to become unpredictable and unreliable. Like other unstable phenomena, the gray market is susceptible to manipulation and has, in the past, disappointed investors.
It's not a good idea to base all your investment decisions only on the gray market premium (GMP), but a staggering number of people check gray market rates daily.
3. Unclear Business Model
The success of an IPO depends on educating investors on the potential of a pre-IPO company's business strategy; ignorance can cause investors to lose interest and result in bad press.
Executives may unintentionally confuse investors in the public market while making presentations at a time when boosting investor interest is most crucial.
4. Erroneous Assumptions
Before, during, and after an IPO, one of the biggest pitfalls that may damage a company's reputation and reduce shareholder value is creating misleading expectations.
Although executives may purposefully establish false expectations to deceive investors, misleading expectations are more frequently produced due to overconfidence or in response to pressure.
Regardless of the cause, creating unrealistic expectations is particularly destructive during the IPO process because there is limited previous data on which investors and analysts can depend. This also leads them to place a more prominent trust in management's assurances.
Suggestions to Avoid the IPO Pitfalls
You need to follow some prime steps to have a successful IPO launch. It can avoid the chances of IPO pitfalls. Let's explore it!
1. Know Your Company's Story
Articulating everything from product roadmap to brand identity keeps all the stakeholders informed. In other words, it is not sufficient to have a good story; it is essential that the company's leadership can both tell it and back it up.
This entails having a workforce equally skilled at proactive brand communication as it is at reacting quickly to both positive and bad news.
Financial performance and KPI data must be available to company storytellers to present their IPO narrative to inspire confidence in potential investors. Thus it is essential to analyze an IPO before investing in it.
2. Prepare for Rigorous Financial Reporting
To communicate an IPO narrative that instills trust in potential investors, company storytellers must have access to financial performance and KPI data.
A corporation can scale more efficiently as its business expands by doing away with manual inputs. Additionally, a company will benefit from clear reporting procedures supported by thorough audit trails throughout the IPO process.
3. Establish Good Corporate Governance
Organizations that can't correctly regulate themselves don't compete well in the public market. Those thinking about going public should set up a governance structure that holds the board and executive management accountable.
Many private organizations are unaware of the critical role of strong governance in long-term success, and those who prioritize it frequently underestimate the time and work needed to build it.
Contrary to the ad hoc practices that may predominate in many private companies, regulators and investors demand that a company's policies be organized, transparent, and consistent when it goes public.
Governance is necessary for the public equity markets, and every director and C-level executive must know precisely how they relate to one another, the organization, and the stakeholders.
4. Develop Risk Management Capabilities
If a company performs poorly, going public exposes it to a great deal of risk and makes it responsible to a larger audience of investors and regulators. A firm that performs poorly is exposed to many risks and is now answerable to a bigger group of investors and regulators due to going public.
A public company must be able to respond when an audit committee or the board of directors inquires about management expenses, approving significant costs, cash access, or forecasting.
This is in addition to ensuring that legal counsel has a strong voice and that a policy protecting the company from the acts of directors and officers is in place.
A sound management system should give users access to automatic rule-based warnings and real-time KPIs so they may spot hazards before they materialize into actual issues.
Conclusion
Launching an IPO is a complex task requiring a higher level of attention. While these steps do not guarantee success as the process gets a lot bumpier without robust preparation and system underpinning.
By doing these things and backing them up with a robust company management system, you may significantly improve your chances of having a successful IPO. With this, you should also know about five potential IPOs to watch for in 2022, as it would provide insights about IPO investments.
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