Peter Goldstein is CEO, Exchange Listing, a strategic advisory firm that counsels high growth companies to list on senior stock exchanges.
Taking an emerging company public is a thrilling, expensive and time-consuming proposition. Determining your firm’s value, organizing and compiling reporting documents and putting together an IPO advisory team—which involves establishing relationships with auditors, investment bankers and lawyers—are just some of the processes and challenges. Market shifts have made it possible for early-stage firms to access capital to reach long-term goals and increase visibility. It’s also a superior exit strategy to selling one’s company.
When management decides to go the IPO route, the company will have to withstand outside scrutiny and analysis. The key is to construct a business model that investors believe in and the company can deliver. Over the years, I have provided counseling to numerous founders as they chose to go public through an initial offering of stock as part of the company’s growth strategy.
Why Is An IPO An Option For Smaller Companies To Achieve Growth?
New acquisitions, improvements, expansion and providing capital to the firm’s founders are just some of the reasons a company might need to raise funds. As a company contemplates this next phase of growth, organizations have several options—debt, venture capital, private funding or an IPO.
While initial offerings for smaller companies were previously limited, they are no longer restricted to larger, better-capitalized names. The current IPO opportunity for micro-cap companies—defined by having a market capitalization of roughly $50 million to $300 million—is optimal. In fact, as leaders have seen, the IPO market is now more accessible than ever for early-stage companies, providing value as well as necessary access to growth capital and human resources.
Whether a firm is in its early stages of growth or is a mature company looking to attract a significant equity investment, an IPO may be the best way to provide access to capital. Companies in their early existence may focus on establishing their purpose and growth strategy and expand into new markets or territories. In either situation, an IPO can help acquire the right resources to operate effectively.
The speculation fury during the dot-com era gave way to the theory that micro-cap IPOs were too expensive and risky. Unfortunately, this myth and the poor reputation have unjustly followed micro-caps. While there are risks and costs associated with IPOs, the right strategy and team can help entrepreneurs access capital and go public early in their life cycle with a win-win scenario.
Other options for growth may be limited. Debt is an option, but limited access and the cost of capital may not be attractive, particularly with rising interest rates. And while the speed and pace that venture capital funds provide can seem appealing, there is the possibility that the VC interests will conflict with existing management’s long-term strategy.
The Shifting IPO Market
Many IPO candidates are sitting it out, but small issuers have dominated the IPO calendar this year. Nine of this year’s 15 IPOs have raised $50 million or less, with seven additional listings scheduled.
Last year, 2021, was an outstanding one for IPOs, as more than double the number of companies went public than in 2020. It was in fact, by deal count, the busiest year. There were 397 IPOs with a raise of $142.4 billion, which made it also the biggest year for proceeds ever.
Wider access to the IPO market has historically been limited to retail investors. However, these sometimes riskier assets also hold the possibility of higher price appreciation. As micro-cap firms list on senior exchanges, this creates a compelling investment opportunity.
Through an IPO, entrepreneurs can access this market segment, and retail investors are able to invest early in the high growth, previously only available to institutional investors.
An IPO can also provide a micro-cap with increased awareness and exposure, additional market share and even an exit strategy for a micro-cap company owner.
Discovering The Right Road Map For Your Micro-Cap Company
After a firm has experienced market acceptance and growth, an option to consider is an initial offering of stock as part of the company’s growth strategy. Whether it be funding for expansion, an exit strategy or recapitalizing, an IPO may be the next step. But this journey requires a strategic road map including systems and controls.
Beginning with the equity listing requirements, a knowledgeable IPO team that has been through the micro-cap IPO process before can help firms prepare a road map and make introductions to investment bankers, lawyers and accountants.
IPO preparations consist of multiple steps and documentation. Communicating and developing the right messaging is critical. Companies may find they need to restructure operations and replace or recruit new key hires for the next stage of growth. An IPO requires an organization to stand up to outside scrutiny and analysis, and the key is to construct a business model that investors believe in and the company can deliver.
A significant step in going public is choosing a board of directors. As I shared in a previous piece, board members should not only represent shareholders and set goals. They need to also take on management’s particular interest in items like corporate governance, executing dividend and options policies, determining executive compensation and more.
After the IPO has been completed, the work is just beginning, making it crucial for companies to continue to rely on their advisory team. Public companies must contend with audits, quarterly reporting and analyst updates. Corporate governance and effective communication with investors take time, and additional capital as a newly listed firm is visible to the world.
The best situated and competitive companies should be built on principles of sustainability and resiliency, as well as healthy corporate governance structures and practices. In my experience, the road to an IPO is challenging, but the right team can help firms find both the best partners and opportunities when they emerge.
The decision to embark on an IPO is a major step in the overall development of a company that requires expertise and knowledge. Through a public listing, micro-caps can gain access to capital and begin their capital markets journey.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.