5 Ways an IPO Can Hurt Your Startup

12/16/2016 | By Hira Saeed

This post originally appeared on blog.up.co


For small businesses, an initial public offering (IPO) is sometimes a key milestone that many strive for. It is the first time that the stock of the company is offered to the public, and represents a new wave of capital and expansion. Small businesses often use IPOs to further their company’s growth and see the IPO as a necessary and crucial step forward. However, sometimes the IPO turns out to be more hindrance than help imposing limitations and headache son the very company that sought to use the IPO as a source of expansion. "Data published by Renaissance Capital indicate that as of June 2, 2016, there were only 34 IPO pricings, compared to the same point in 2015 when there were 70 IPO pricings. These 34 IPOs raised only $5.5 billion as of June 2, 2016. This amount is 55.8% below the $12.5 billion raised by IPOs between Jan. 1, 2015, and June 2, 2015."

Callum Laing, a partner in the private equity firm Unity-Group and co-author of a new book “Agglomerate – From Idea to IPO in 12 Months”, shares a whole new insight of five ways an IPO can hurt a small business. These are a few ways that you should avoid at all costs, or your next IPO may become one of the many that flounder.

1.     Succession

Entrepreneurs are usually integral to the business. They build the company from the ground up, know the ins and outs of the business, are familiar with its culture, and are even at times central to the image of the business. Most of the times, they are the driving force and passion behind the enterprise who are working tirelessly for years to help the company reach an IPO. However, when it is the time for an IPO there may be shifts in how much they can be involved in the day to day running of the business, and often, the original entrepreneur leaves, taking most of the drive and passion with them.

2.     Culture

With the major changes that come from an IPO, key people often leave the business, sometimes with the key customers. This is truer if the business is not well prepared for the transition. For small businesses, talent is crucial and the dynamics of the team and the unique talents of those involved are often a central selling point. Often, even the departure of a single customer or key staff member can result in serious fiscal consequences. An IPO can also result in a shift in the brand identity, forgetting that the brand is actually a valuable asset that should be retained. However, with the brand and culture now controlled by a board of investors rather than individual entrepreneurs, culture and identity may fall second to maximising profit margins, ultimately hurting both.

3.     Cost

Listing IPO’s is extremely expensive and time-consuming. Entrepreneurs used to working with a small tight knit cabinet find they will need a board to run the business and the IPO. In addition to advisors, specialist non-executives and experienced board members are often essential to attracting investors. Some companies think having strong international markets and business partners is a great way to reduce risk and improve valuation, but the added risk and expense of operating in a foreign country can mitigate any of the benefits such a strategy provides. Finally, public company investors are a generally very different from the angel investors and venture capitalists that the business would have worked with so far. Because of this, most roll-ups are either debt funded or investor funded – either way, this creates huge stress on the business.

4.     Liquidity

Raising money for smaller businesses is very hard. Small businesses may find that they are just not big enough or de-risked enough to attract adequate funding from an IPO. With the Federation of Small Businesses reporting 99% of all businesses globally as small or medium enterprises, the competition is stiff. And even when you do get investments, it is often at the price of control over the business. Publicly listed shares will often carry a premium for their liquidity, and the entrepreneurs must show a strong business case for every use of money to their new board of investors. Even with more capital, the lack of liquidity and slow movement of funds can prove more of a hindrance than a boon.

5.     Timing

Timing is critical to creating the best value and wealth from an IPO. Many good businesses that were keepers back in 2007 or 2008 do not exist anymore. The biggest question is always when to sell? Sell too early and you may miss out on all those contracts that you have slowly been building trust and market presence to acquire. The biggest issue with wealth creation in business is that only a small percentage of businesses actually create any wealth for their owners, and often nothing more than a return on capital. Not a great return if you add up all the hours, risks, and sacrifices required to start a business.

What is the Alternative to Traditional IPO?

Instead of going at an IPO alone, and potentially facing all of the pitfalls, small businesses can consider joining together with other small businesses and forming a holding company, banding together for a collective IPO. This process, known as “agglomeration”, can give all the member businesses an instant boost in scale and diversification, as well as boost the geographic reach of each member if other members are in diverse locations. This can immediately increase valuation and make the small business more attractive to investors. The public listing allows business owners more financial freedom while tackling the public listing with other small business owners helps foster cooperation to drive share value. Agglomeration allows a pooling of resources that also reduces the cost of the IPO, eliminating the need for separate advisors, boards, and non-specialist executives for each company.

Best of all, each individual entrepreneur can remain 100% in charge of their own business, retaining their own brand name, culture, and staff. This reduces the risk of shifts in company culture and staff or leadership that often mars the IPO process. Since each business is an individual unit within the group, there is limited liability – and if one entrepreneur chooses to leave, it is relatively easy with publicly listed stock to go and bring a similar business unit into the holding company and assimilate their management team. This creates easy natural succession without having to sell the entire parent company.

IPO’s can be difficult for small businesses to go at alone, with many pitfalls that can wind up hurting the business more than the increased capital can help. Agglomeration with other small businesses can allow entrepreneurs to have a better chance of making the IPO, and their business, a true success.