Back to basics for IPOs?

Prior to launch, companies should be prepared to undertake more extensive investor marketing efforts to develop longer-term relationships, gauge interest in their story and incorporate feedback into their messaging and proposed IPO structure and terms. We will also likely see a rise in anchor orders from brand-name investors disclosed at IPO launch, signaling interest in the deal and reducing the supply of shares for sale in the IPO to create pricing tension.

Following the sharp declines in the performance of the 2021 IPO class, investors will seek more rational valuation approaches and greater IPO discounts as the IPO market reopens. Companies considering an IPO, particularly early in the next IPO cycle, will likely need to be less valuation sensitive at the time of IPO and have compelling longer-term reasons to be public.

By downsizing the percentage of the company sold in an IPO, issuers can influence pricing and enhance aftermarket trading by restricting the supply of shares available for sale. This requires adequate private funding ahead of the IPO, but it can be an effective strategy to take pricing leverage away from the buy side in an IPO.

The use of hybrid auctions to drive pricing at IPO may be curtailed as the IPO market returns. Traditional book building generally provides investors with greater transparency into investor sentiment, potentially facilitating better longer-term stock performance for IPO investors.

A return to greater control over the ability of existing shareholders to sell additional shares in the aftermarket could be required by IPO investors to provide comfort that aftermarket performance won’t be unduly affected by heavy selling pressure. Companies and banks may be inclined to reduce areas of potential pushback in IPO marketing by returning to more conventional IPO lockup structures, making the management of shareholder liquidity needs ahead of an IPO even more important.

A primary goal in an IPO is establishing a natural long-term shareholder base. Ideally, this should begin well ahead of the IPO roadshow to “get on the radar,” develop relationships by “doing what you say you will do” and incorporating investor feedback into your strategy and messaging. Pre-IPO companies need to build investor relations muscle well in advance of their public debut. Proper preparation and support from an experienced investor relations team can help ensure that these meetings achieve their goals and bypass some of the common pitfalls companies often encounter.

Companies frequently debate whether to pursue a final funding round ahead of an IPO or the optimal sizing of a pre-IPO financing, but there is no one-size-fits-all answer to these questions. However, ensuring adequate capitalization can be critical when IPO windows are particularly fleeting, growth capital can be challenging to come by, and IPO sizes may need to be managed to optimize pricing and liquidity dynamics.

In some cases, the pullback in the IPO market has kept companies private for longer than expected with their shareholders invested for longer than they may have intended. Some companies can provide private funding solutions to generate liquidity for these investors. When shareholders’ considerations can be addressed privately, companies can better manage their IPO timelines based on company-specific circumstances and prevailing market conditions rather than succumb to pressure to IPO before they are really ready.

The nature and extent of the IPO market pullback have illuminated the need for companies to demonstrate profitability or a path to profitability. In some cases, this requires a fundamental shift in strategy toward reducing experimental initiatives to execute against what a company does best and/or moving away from “growth-at-all-costs” or “market share-is-all-that-matters” mentalities.

Making the move to the public markets requires a distinct set of skills and an operational rigor many entrepreneurial companies have not yet institutionalized. The best way to prepare for this monumental change is to begin operating today as you will be expected to operate as a listed company. From quarterly reporting, to identifying and managing key performance indicators (KPIs), to implementing appropriate internal controls, and beyond — the time to make these adjustments is well ahead of the days, weeks and months leading up to an IPO.