2022 Is The Perfect Time To Get Ready For An IPO

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    By: Maria Pacella

    2021 was a fantastic year for Canadian tech IPOs. Public offerings, which had been historically rare for tech startups north of the border, reached record highs last year, by volume and dollars raised.

    Today, the outlook on public markets is a little less rosy. Stock markets globally have seen a major slowdown since 2021, which is dampening the appeal of going public. Many of the companies that debuted to ravenous investor appetite in 2021 are now struggling to reel in support. As a result, many healthy, high-growth Canadian tech firms have hit the pause button on their go-public plans.

    By most measures, it seems the window for tech IPOs is closed. While we don’t know what the rest of 2022 will look like for Canadian tech stocks, rising interest rates and inflation are keeping the window shut, but eventually, it will reopen. For founders who are still determined to IPO, now is the time to get ready.

    Going public is a growth strategy that can quickly turn into a substantial risk when you aren’t adequately prepared. Of course, nailing your timing is critical in this preparation process, but even when the markets don’t seem favourable for an IPO, you can still see a successful offering through if you get four other ingredients right:

    • Solid fundamentals
    • A compelling reason to go public
    • A resilient business
    • Patient long-term investors

    Your Business And Fundamentals Should Be Great

    Crafting a persuasive story for investors requires founders to back everything up with reliable metrics. Valuations are more turbulent in today’s market, which is why you need strong fundamentals that can assure investors that your growth goals are achievable.

    Surprisingly, many companies take the leap into public markets and lean into growth before they nail down core aspects of their business model. If your company is still working out product-market fit, or patching up glaring holes in its offering, you’re likely not ready for prime time.

    Take precision agriculture firm Farmer’s Edge (TSX: FDGE), which ventured into the public arena in March 2021 and has, unfortunately, disappointed each quarter since. Although Farmer’s Edge is an interesting business that aims to deliver differentiated value to its customers, the startup is still clearly facing product-market fit challenges and is now restructuring its leadership as a public company.

    Profitability is not a prerequisite to a successful listing, but the bar is higher than ever for companies to get investors on their side. An IPO-ready company, if not cash-flow positive, should have persuasive growth metrics that founders can use to chart a clear course to profitability.

    Magnet Forensics (TSX: MAGT) is one of the few 2021 tech listings that is currently trading above its initial share price. Magnet Forensics is a profitable company that went public with little debt on its books, and recorded very strong revenue growth in the year preceding its IPO – growth the company has managed to maintain.

    Private companies have the luxury of remaining tight-lipped about their performance, whereas for public companies, transparency is not just a recommendation, it’s a necessity. Your management team must be ready and able to communicate clearly with investors on business fundamentals and be accurate in your financial reporting and disclosures. When a company looks like it’s trying to hide something, investors will steer clear and regulators will take notice.

    You Need A Compelling Reason To Go Public

    If founders want the added difficulty of taking a company public, they must have a strong rationale for making this their next move. Particularly in today’s market, you need a very solid grasp on why going public will benefit your company in the long term. Here are a few common scenarios:

    • Are you simply trying to raise more money? Being able to raise lots of cash quickly might seem like the best reason to go public, but an IPO isn’t your only ticket. IPOs may lead to an influx of capital when successful, but completing one is not cheap and targets are not always met. If the goal is to just have cash in the bank or for your shareholders to achieve liquidity, consider the secondary market, debt financing, or a venture round.
    • Does your company need a stronger sense of legitimacy? Along with raising money, going public can add to companies’ perceived legitimacy among investors and customers since they are subject to more scrutiny. However, you must be able to convince investors of your ability to grow consistently and steadily, while keeping up with highly stringent regulations and audits.
    • Will being public help you achieve other strategic goals? An influx of capital must be put to good use, whether it’s paying off debt, boosting R&D, or executing a ‘roll-up’ strategy, which involves using proceeds to fund future acquisitions and market consolidation. All of these expenditures must make strategic sense for your business and should have clear targets behind them.

    “As we’ve seen in the first few months of this year, even the healthiest companies are vulnerable to dwindling investor appetite, particularly when those investors rely on short-term results.”

    Your Business Must Be Resilient

    Since the onset of the pandemic, virtually every industry has undergone digital transformation to some extent. From virtual healthcare to online education, a number of tech businesses have benefited from the shift to digital, which contributed to the blockbuster go-public deals we saw last year.

    As we start to emerge from the pandemic, the true winners are still being decided. COVID-19 and its far-reaching effects on business and daily life gave new purpose to the adoption of many technology solutions, which led to explosive growth for many companies. Now, many of the companies that rode the wave of digital disruption are facing doubts over whether the pace of their growth is sustainable long-term.

    The price of your IPO is not solely dependent on inward-looking business metrics. If the last two years have taught us anything, it’s that any industry is vulnerable to major disruptions, be they pandemics or supply chain delays. Competition is another factor that will determine whether your IPO is too ambitious – unless a company is growing in a blue ocean of uncontested market space, founders should carefully consider whether going public is wise.

    We view Copperleaf (TSX: CPLF) as an example of a company that was able to navigate these macro factors well before its own IPO in October. Copperleaf targeted the unchallenged utilities segment with a product that turned customers into evangelists. The company has managed to stay resilient over the last two years of global challenges and has maintained a healthy moat since its debut.

    You Need Patient, Long-Term Investors

    As we’ve seen in the first few months of this year, even the healthiest companies are vulnerable to dwindling investor appetite, particularly when those investors rely on short-term results. Long-term investors not only support your preparation for an IPO, but also help you navigate life after the bell rings.

    Long-term investors aren’t there for a quick trade – they’re willing to accept a higher amount of risk in pursuit of higher rewards. For this reason, long-term investors can afford to be patient for a longer period of time, even if this means forgoing a liquidity event when it’s not the right time.

    Public markets can be a fantastic mechanism to raise money, gain legitimacy or exposure, and fast-track your growth strategy, but the ultimate success of an IPO will depend on a number of factors. Even if the stars aren’t aligned for an IPO right now, founders should always be ready to make their move.

    Maria Pacella(CFA)
    is managing partner at Pender Ventures.