Is Your Company Ready to Go Public?
To Investors,
The end goal of any investor in a startup is to get their money back and then-some. Yes, you might like the company and feel strongly in favour of the company’s mission, but if you’re running an investment organisation, your number one goal is financial returns.
Most startups target an initial public offering (IPO) as the final exit that will allow the company to repay its existing investors and clear the startup’s cap table. Additionally, listing your shares on a public exchange allows the company to set its place in the market. Let's look at the context that allows you as a founder to decide whether your company is ready to go public.
Profitability
Many people comment that a company must be profitable before it goes public otherwise no one will want to buy the company’s shares and the IPO will be a flop (i.e. when the trading price of the company's shares in the public markets falls below the listing price and remains lower than the listing price for an extended period).
That can happen but history has proven that that’s not always the case.
When Amazon and Tesla went public, they were unprofitable. Since their IPO year Amazon’s and Tesla’s share prices have gone up 20 000%+ and 11 000%+ respectively.
It's early days but the same seems to be true regarding the share prices of Uber (+73.47%), Palantir (+142.74%), and Airbnb (+10.14%) since their respective IPO years - not yet for Snowflake (-36.70%); noting that each of these companies were also unprofitable when they went public.
A significant amount of the growth that a company experiences can happen after they go public.
Corporate
The simple reason is that that level of global and public exposure allows the company to straighten itself out in the following ways:
Reporting is strictly quarterly, and the back-end admin like accounting and independent audits, etc must be accurate and on time. The company is now a corporate (suits and ties, no time for B.S)
You get exposure to a global base of investors who will scrutinise every aspect of the company through a magnifying glass.
When your company is scrutinised that deeply you better be able to satisfy the smart money.
There are two classes of investors to be aware of. One class is the day traders who gamify the financial markets and are only in it for small daily profits. They are the reason a company’s share price fluctuates up and down hourly.
The second is the sharps - the smart money players who will still buy your company’s shares no matter what the news of the day is or how it fluctuates daily because they’ve done the work to understand the true value of your company. This is the investor you need to convince. Their stamp of approval attracts more investors, which will attract more customers to your company, which will grow the company's performance and in turn attract more investors.
How do you know if you’re ready to go public?
Some questions to consider…
Do you have a clear roadmap on how to achieve certain goals?
This is Tesla’s roadmap in two Master Plans which I’ve tabulated to show how they’ve executed according to the plan since day one
How large is your level of confidence in reaching that goal?
Playing on the global financial stage puts you in contact with the best-in-class executors. You can recruit and collaborate. Your confidence in reaching these predetermined goals shouldn’t wane.
Can you be the best in the market to provide a certain product or service?
The public markets don't like number two in the sector.
For example, Uber is up 50% while Lyft is down 74% on the all-time chart below.
Can you remain the best for a sustainable period?
When the sharps scrutinise your business amid earnings, or a sales target miss will they still want to keep shares in your company or perhaps even buy more?
Conclusion
It takes a while to build a positive reputation as a company that executes. If you’re playing the long game, you should be able to prove that (regardless of current profitability) you can remain the best for a sustainable period. If you can show a clear roadmap to achieving significant goals as a company, then you’re ready to go public.
The financial markets are a lot more nuanced than discussed here so dig a little deeper on your own. Just remember that as a publicly listed company you’re playing in the Champions League. You’re playing among the best executors in business and room for error is marginal.
I hope you enjoyed this letter.
One the journey to becoming a master capital allocator - one lesson down, a billion more to go.
Respectfully,
-Mansa
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Disclaimer: this note is not financial advice and is for informational and entertainment purposes only. We may hold positions in the companies discussed. Do your own research.