Getting your business on a stock exchange isn’t the holy grail it once was. Across the pond the likes of Uber and Airbnb have fiercely resisted suggestions they should be going public imminently, preferring the privacy and control of private funding. Closer to home there’s been a drought of IPOs as many of Britain’s fast-growing companies have chosen to be snapped up by large competitors or fall into the hands of private equity firms instead. Market turbulence has hardly helped matters.
But there are still plenty of reasons to pursue an IPO. While floating is normally seen as the preserve of companies approaching £100m in revenues or more, it’s possible for smaller firms to go public too.
‘AIM (the Alternative Investment Market) is a great opportunity for UK businesses to be able to think about accessing capital in the public markets without having to be main market size,’ says Ed Molyneux, whose accounting software company FreeAgent floated on AIM last year with a turnover of around £34m. Before you decide to take the plunge here are a few things to bear in mind.
1. Why go public?
Funding is a big reason. ‘Our decision to go on AIM last year was really all about growth,’ says Steve Flavell, co-founder and co-CEO of conference call provider LoopUp, which raised £8.5m in its float. As well as raising money through the initial offering, businesses can continue to drum up more cash by issuing new shares and also tend to get better rates when borrowing money.
Another reason to go public is to keep existing investors happy by making it easy for them to sell their shares. ‘I was keen that we should be able to generate some liquidity for our very early investors who’ve really been with us for the long haul,’ says Molyneux. And it can improve your reputation too. ‘The validation that came from having been through the listing process will prove to be a powerful thing in terms of giving partners confidence that we’re in for the long haul’.
2. Would VC or private equity funding be a better move?
If your main aim is just to raise some cash then you might be better off looking elsewhere. Venture capital and private equity firms can be an invaluable source both of cash and expertise, without the need to expose your business to the scrutiny required of those on a stock exchange. But they’re not for everyone.
‘I didn’t really see us aligning with venture capital timelines or venture capital expectations of returns...we want to build this business in a sustainable way,’ Molyneux says. With professional VCs on your back you will be expected to push the business to maximise growth.
3. Is your business at the right stage?
Going public ‘requires a business model that has a very high degree of predictability - investors don't like surprises,’ says Molyneux. Potential backers might be willing to overlook a degree of volatility if you’re growing at a truly fearsome rate in the mould of Facebook or Amazon, but most businesses will need to show steady profitability. ‘I would caution against businesses that don't have that real confidence in a meaningful level of growth with some upside opportunity, because it can be a very rough ride if there's too much uncertainty there.’
4. Are you prepared for all the rules and a higher level of scrutiny?
Being a listed company is about more than just how your shares are traded. You will be expected to follow the spirit if not the letter of the corporate governance code. That means having a proper board structure that will hold you, the management, to account in an independent manner.
‘Previously our board comprised investor representatives,’ says Molyneux. ‘We had two directors who were early investors, plus an observer and the three co-founders. That wouldn’t have been appropriate for a public company so now we have a new non-executive chairman, plus a NED (non-executive director.)’ There are exceptions of course – just look at Sports Direct, whose founder Mike Ashley exerts his power from the very unorthodox role of ‘executive deputy chairman’.
Going public will also create a lot of work for your finance department, which will have to pull all the figures together for regular shareholder updates. And it will be your job, as leader of the company to help communicate those numbers to investors, reassuring them that you’re on track.
On the upside, extra scrutiny can be a good thing too - it will expose you to informed views and opinions on your company and markets that you may not have considered before.
5. IPOs shouldn’t be rushed
‘One of the biggest learnings for us was to take your time,’ says Flavell. You need to put in long hours to ensure your business is ready. And even if it is at the right sort of stage, you’re not going to be on the stock exchange within a few weeks. Advisers need to be chosen, prospectuses need to be compiled and potential investors need to be buttered up if you’re going to make a success of it.
FreeAgent first thought about going public in 2014. ‘We spent a bit of time that autumn talking with nomads (nominated advisers) and market investors, and the general consensus was that it was too early,’ says Molyneux. ‘We went back to investors a year after our initial visit. We had done exactly what we said we were going to do in terms of delivering growth, and that made them more confident.’
Timing is important too. LoopUp originally planned to float on June 24th last year until the EU referendum put a pretty big spanner in the works. But after getting reassurance from investors it managed a successful IPO in August.
There are plenty of challenges that come with floating on the stock market, and it requires a lot of work. But done correctly it can improve your financial position and give your reputation a shot in the arm too.