The initial public offering (IPO) market looks a lot different now than it did just two or three years ago. In 2022, IPO volume fell by 45% from 2021, to just $6.2 billion, with only two listings raising more than $250 million each. The first quarter of 2023 has been quiet as rising interest rates, high inflation, political uncertainty, and concerns about a recession prompt some investors to pull back on new IPOs and issuances.
“Much of that has been driven by investor demand,” said Jack Cassel, head of NASDAQ's new listings market. “Or, really, a lack thereof.”
An incredible number of quality companies are looking to come into the public markets, said Cassel, but most are in a holding pattern.
“This year, we’re expecting a ‘reversion’ back to what took place in 2017 through 2019,” he said. “Both 2020 and 2021 were anomalies due to pent-up demand.”
Where investor sentiment in 2020-21 focused on “growth at all costs,” Cassel said investors are now pivoting towards less risky assets and equities.
“The quality deals are still getting done, with the prevailing sentiment being, ‘we will get through this,’” he said. “Reflecting on the last 20 years, we have always bounced back.”
Cassel is not expecting a V-shaped recovery — a quick improvement after a sharp decline — but rather a prolonged bounce back over several quarters. During that period of recovery, the market will steadily regain its strength.
“From the IPO perspective, the big question on everyone’s mind right now is, ‘Who's going to be first?’” Cassel said.
Companies contemplating moving on an IPO should start preparing, says one market veteran.
“Major success stories have been born out of circumstances like those we face today,” said Craig Clay, president of global capital markets at global risk and compliance solutions company DFIN. “Even though a company may be delaying its IPO, now is the time to start getting your processes in order. The right technology is essential.”
Clay says DFIN’s ActiveDisclosure financial reporting software,(opens in new tab) integrated with NetSuite's ERP system, is a powerful and secure solution for companies on the road to a public offering and can increase the odds of being one of those success stories.
The IPO Window Will Reopen
From his vantage point as managing partner at Connor Group, a NetSuite Alliance Partner, Jim Neesen sees a high certainty that the IPO window will reopen this year.
“Bankers are telling us that will happen during the second half of 2023 for traditional IPOs,” said Neesen. “Special purpose acquisition companies [SPACs] that are seeking mergers may act sooner, as some of those SPACs expire.”
Neesen said that the 2023 IPO timing estimate is based on a few key factors. For starters, market volatility is much narrower than it was last year, which means investors may be able to take on more risk and get higher returns. Also, the Fed appears to have its interest rate dialed in, and inflation is ebbing.
Finally, organizations that go public during the latter part of the year will be using earnings estimates for 2024.
“If the economy improves in 2024, many companies will have much better earnings estimates or revenue numbers, which will lead to higher valuations,” Neesen said.
Five Steps to a Successful IPO
Because it can take anywhere from six to 18 months for a company to prepare for an IPO, organizations considering a public offering should begin planning now. You need ample time to get revenue, profitability, and overall go-to-market approaches in place well ahead of the initial public offering.
Here are five steps that companies planning to go public in the next two to three years can take now to prepare for a successful IPO:
1. Start with a current state assessment. Because your IPO window hasn’t opened yet, it’s a great time to assess your company’s current position, address any issues, and lay out a roadmap for the next few months. For example, you can look for ways to save money, better leverage external resources, and find ways to make better use of your own internal teams. Technology can help.
“You can use systems in NetSuite to build out that roadmap,” said Neesen. NetSuite Planning and Budgeting, for instance, automates labor-intensive planning and budgeting processes so finance teams can quickly and easily produce budgets and forecasts.
“Use NetSuite to put the policies, procedures, internal control, and financial planning and analysis [FP&A] processes in place,” said Neesen. That way, even if the IPO window is delayed beyond mid-2023, you’ll be ready to act when the opportunity emerges.
2. Find new places to add value. Right now, companies should think about the best places to invest in their businesses in a way that adds value to their operations. Neesen advises leaders to use Pareto’s Law when making these choices.
“Pick 20% of activities that will add 80% of the value to grow and scale your business,” said Neesen.
One way to do that is to get obsessive about tracking key performance indicators. KPIs are quantifiable business metrics that track and measure progress toward strategic objectives, like improved operational performance. Start with, say, 20 widely used KPIs relevant to most businesses(opens in new tab) and then add those that demonstrate your unique value proposition.
3. Build relationships with investors. “Without the investors, none of the other IPO dominoes are going to fall,” said Sharon Tetlow, founder of Potrero Hill Advisors. “Meeting with investors is work that never stops, and it's a huge win if you can invite more investors to get to know your management team, its ability to set and meet milestones, and how that team navigates bumps in the road.”
Relationship-building efforts, which start with the Series A funding round and flow right into any subsequent rounds and the IPO, also help assuage investor concerns about the credibility of your team.
“It gives you an opportunity to differentiate your company from sloppier corporate teams,” said Tetlow. Companies can use the current IPO market “downtime” to choose the right investor syndicate and/or bank.
4. Lay out your ERP roadmap. A new ERP can take time to implement and get dialed in for the typical public company, which is why Neesen suggests getting this part of your technology infrastructure in place sooner rather than later.
“NetSuite, which we’ve seen used for roughly 70% to 80% of our IPOs, is an outstanding cloud-based ERP that offers a roughly 100-day implementation,” said Neesen. “ERP is a pathway to begin ‘acting’ like a public company; it creates more discipline and makes you think about how to complete a public company close.”
For best results, lay out your ERP roadmap early and, if necessary, use a phased approach based on incremental changes and improvements. NetSuite’s SuiteSuccess implementation methodology,(opens in new tab) for example, packages the experience and learnings of tens of thousands of ERP deployments into a set of leading practices that gets you up and running quickly.
5. Practice closing the books like a public company. One of the best ways to start acting and operating like a public company is to close like a public company would. NetSuite facilitates this process by integrating directly with ActiveDisclosure, an application that supports real-time collaboration and accurate SEC reporting.
“Start practicing the closing process as if you were doing SEC reporting,” said Neesen, who also advises companies to think about their systems and processes from the accounting and FP&A perspective.
“Think like an accountant,” he said. “Put in a system that works for accounting, financial planning, and FP&A, and then practice what your close might look like. When you do go public, the closing process won’t be a huge lift because that muscle memory will be in place.”
Prepare Now for IPO Success
All markets are cyclical. Improvement is often waiting right around the next corner. This applies to the current IPO market.
“Don't let the appearance of the most recent market get you down,” Tetlow said. “Taking a company public is an ultra-marathon, not a sprint. If you keep your investors primed, everything else is manageable.”
Hey! It’s the 30th of the month! Ready to turn your finance department upside down for the next 10 days? No? Then continuous accounting may be for you.(opens in new tab)