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What To Expect When You're Expecting An IPO

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Risun Udawatta   March 07, 2019

The moment we’ve all been waiting for is finally here. No, we’re not talking about the Game of Thrones trailer dropping. We’re talking about tech unicorn IPOs, with Lyft’s recent S-1 filing kicking it all off (check out our blog post on reviewing S-1s). With more companies slated to enter the public markets this year, it’ll be important to understand the IPO process, which we breakdown for you in this blog post.

Source: Crunchbase


For startups, an IPO is not for the faint of heart. It can require years of preparation to ensure the right people and processes are in place to comply with the various securities laws and to pass muster in the public markets. IPO preparation is largely done behind the scenes — once plans for an IPO are disclosed, any backtracking may seriously impact the company’s ability to successfully list on a national exchange in the near future. Below are the major steps that companies take during the IPO process:

Stages of an IPO

Hire an Investment Bank

One of the telltale signs a company is pursuing an initial public offering is the hiring of an investment bank to lead the IPO process. Investment banks typically have years of IPO experience and also investor relationships that corporations may lack. Some investment bank responsibilities include preparation of financial statements, valuation, investor outreach, and book-running (the process of tracking information about investors interested in participating in the IPO). Hence, hiring an investment bank signals to the market that a startup is preparing to go public.

Confidential Submission of Draft Registration Form to the SEC

As discussed, an IPO can be taxing on a startup, as it requires complying with securities laws and regulations, like the Securities Act of 1933 or Sarbanes-Oxley Act of 2002. Born out of those regulations, a company is required to file a registration form, commonly known as the S-1, in order to sell securities to the public. An S-1 is an initial registration form for new securities that is required by the SEC – for more information on what is in an S-1 and what to focus on, check out our blog post. As a first step, a company will confidentially submit a draft registration form to the SEC for review and comment. Recently, unicorns like Postmates and Uber have confirmed confidential S-1 filings with the SEC.

Publicly File the S-1

Once a company has gone through a couple rounds of comments from the SEC, a company will publicly file an S-1. At this point in the IPO process, a company has signaled its firm commitment to pursue an initial public offering, and barring any extreme turns in the public markets, a company will likely list on a national exchange like the NYSE or Nasdaq. It is important to note here that the first S-1 filing will exclude the number of shares and the share price that will be offered to the public. However, this public filing will disclose detailed financial information and will give public investors a look under the hood of a company for the first time.

IPO Road Show

After publicly filing the company’s S-1, the company, along with its investment bankers and lawyers, will go on a “road show.” An IPO road show is the presentation given to potential buyers. Management, bankers, and lawyers will travel the country presenting an investment deck to wealth managers, institutional investors like hedge funds, and other sophisticated buyers. It gives investment professionals direct access to management and allows them to ask key questions. Ultimately, the road show is meant to determine appetite for the security and at what price investors are willing to buy the IPO shares.

SEC Declares the S-1 Effective

Following the IPO road show, the investment bank will divvy up the total shares offered to the various investors and determine the final pricing of the shares. Subsequently, the company will complete the S-1 filing by filling in the number of shares to be offered and the price of the security. The SEC will then declare the S-1 effective, meaning the company has met all the disclosure requirements to sell shares to the public.

Trading Begins

After the SEC declares the S-1 effective, the company’s shares will officially begin trading (typically the next day) on the chosen national exchange. Trading is usually commemorated by the company ringing in the trading day on its exchange of choice. The first few days of trading are closely watched by the investor community as investors hope for an IPO pop in share price. In the event the newly-public shares trade below the IPO price, it may point to some fundamental weaknesses of the company or that the IPO was incorrectly priced. In the event the shares trade higher than the IPO price, the offering will be deemed a success, albeit having left money on the table for the company.

An understanding of the above steps will help you keep track of the process and how close certain unicorns are to their IPO. Timing and speed of the IPO process will differ for each company, and certain companies may have fewer disclosures or an easier-to-understand business model that may speed up the process. In the event of severe market turbulence, IPOs may be delayed or postponed indefinitely even up until trading day. In the end, companies control their destiny and can pull out of the IPO process at any point.


2019 IPO Outlook — A Bellwether Year for the New Tech Elite?

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Adam Augusiak-Boro   November 15, 2018

As the bull market charged into its ninth year in 2018, with the FAANG tech giants (Facebook, Apple, Amazon, Netflix and Alphabet’s Google) leading U.S. equities markets to record highs, many of us thought we would have seen stronger IPO activity. However, with under two months left of 2018 and despite favorable market conditions, this year’s U.S. IPO count is still nearly 100 IPOs lower than 2014’s total of 275 priced IPOs. At EquityZen, we continue to believe that IPO volume will remain subdued compared to prior bull markets given the secular trends we see in the U.S. capital markets.

Our team at EquityZen took a closer look at the companies we believe are primed to go public in 2019. To read our full 2019 IPO Outlook, please click here.

Profiling the Average Tech Company at IPO

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Alex Wang   April 13, 2016

In August 2015, we published  “But When Will They Go Public? A Profile of the Average Company at IPO”, in which we analyzed 71 venture-backed tech companies that went public in the US between January 2013 and June 2015. As a result, we arrived at the profile below of a “typical” tech company at IPO:
Exhibit: A typical tech company at IPO

Source: Capital IQ, CrunchBase, Company S-1s, EquityZen
Unfortunately 2015 was not a great year for tech IPOs--in fact it was the worst year since the Financial Crisis, with only 28 technology companies entering the US public markets. Have things changed since July 2015, when we last crunched the numbers? In this post, we analyze the 11 (that’s right, just 11) information technology companies that have gone public in the US since July 2015.

Your Typical Tech IPO

Average time to IPO remains unchanged. This cohort of companies took 11.4 years on average since inception to go public, which is almost the same with our previous analysis. However, high variability comes with this much smaller sample group: it took the youngest company, Square, six years to go public; whereas for First Data Corporation it took 26 years. 

Company and offering sizes were similar as well. On average, the LTM revenue of these companies was $1.06B, with a net profit margin of -6%. Their average gross offering was $413 million, 2.2 times of companies that went public between January 2013 and June 2015. However, taking out the largest offering from First Data ($2.6B gross offering), then the average drops to $198M, similar to our previous analysis. Without First Data, the group’s average revenue becomes $388M, very close to the previous group.

Seven of the eleven companies analyzed have fundraising data in CrunchBase, and they’ve raised on average $212M in equity funding before going public. The average last round before IPO was $75M, slightly higher than the $63M in our previous analysis.

So what do these tell us? A typical tech company at IPO looks pretty much the same in the past three years.

So, Have These Newcomers Returned Similar Rewards to Investors?

Similar to our previous analysis, most companies in this period managed to return between 0-1x premium back to their last private round investors (based on 8 companies in this set that have reported private round pricings). Two smaller companies, Mimecast and Adesto Technologies were able to return 4x- 5x premiums, whereas Square went through a much discussed down-round. The average premium of these companies was 1.25x, much lower than the previous 1.90x. Arguably, IPO price correction has begun.

Exhibit: Offer Price Premium over Last Private Round- # of Companies

Source: Capital IQ, VC Experts, EquityZen

These newly minted public companies expectably have high volatilities in stock prices. Unfortunately, they haven’t been able to beat the market, or the overall tech sector yet. As shown in the chart below, since Jan 4, 2016, overall S&P, S&P Information Technology, and Nasdaq- 100 Technology Sector Indices all have went up slightly between 1.7% to 2.7% as of April 12, whereas the newcomers’ prices dropped by almost 13% weighted by market cap.

Exhibit: Stock Return Comparison (Jan 4, 2016 price as baseline) 
Source: Capital IQ
And where are these companies trading at now? On average a 4.18x price-to-sales ratio. It is higher than S&P 500’s 1.8x and Nasdaq’s 3.1x, but much shy of that of Facebook, Google, and Microsoft.
Exhibit: Market Cap/LTM Revenue (PS) Ratios
*As of April 12, 2016
Source: Capital IQ, EquityZen

What Now?

Although based on a much smaller sample size, a typical tech company at its IPO still looks pretty much the same, and private investors are still able to get positive returns in most scenarios. However, the market has become much more conscious over these newly public tech companies, as the premium between offer price to last private round pricing is shrinking, the stock prices are highly volatile and suffering negative returns, and the price-to-sales ratios are humble in comparison with tech elephants. These data points confirm what we've observed anecdotally-- public markets, despite recent recovery, remain jittery about tech IPOs, and it is likely that the first few tech companies to make the leap may have to go public in an "IPO down round".

We believe the current market conditions present risks, but also bring opportunities. Private shareholders may consider liquidating to avoid a longer hold-up, whereas investors may be able to extract more value through investing in pre-IPO stocks now. Please refer to The Pre-IPO Investment Opportunity in a Down Market and A Down Market: When Liquidity Matters for our previous detailed analyses.

I’d love to hear your thoughts. Please comment below.

Data sourced from 11 technology companies that executed an initial public offering from July 2015 until March 2016 in the US (two Chinese companies also went public in the US in this period, but are excluded due to lack of data). Data retrieved from Capital IQ, company S-1s, and Yahoo Finance. Past performance is not indicative of future returns, and this is not an investment recommendation. Links to outside sources do not constitute an approval or endorsement of the content on those websites.