The IPO Crisis: Why Companies are Waiting Longer Than Ever to Go Public

It wasn’t called the “dot-com bubble” for nothing. In 1999, a total of 486 companies went through an initial public offering (IPO), followed by 406 the next year.

We all know what happened to the tech market in 2001, but the fact is the market for IPOs still hasn’t recovered from the crash, with only 190 U.S. companies going public in 2018. Things are trending up slightly in 2019, but the fact remains that fewer U.S. companies are going public today than previously.

The question is why.

Because, for a budding technology company, going public has many advantages.

For one thing, conducting an initial public offering (IPO) has the potential to grow a company exponentially, infusing it with much-needed cash to fund operations and future growth. In 2016, the median proceeds received from an initial public offering were $94.5 million. This money can be life-changing for a startup and its founders after years of sacrifice and hard work.

The funds can be used to hire new employees, build new facilities, reduce debt, fund capital expenditure, acquire new technology or other companies, or to finance research and development.

Beyond infusing cash, an IPO puts a company in the public spotlight, multiplying its business potential. The higher profile that an IPO offers in turn gives companies the intangible asset of credibility, which presents access to new opportunities that range from high-value business partnerships to the ability to attract and retain talented employees and beyond.

Why Companies Are Delaying IPOs

But, there’s a catch.

Operating a public company is very different from operating a private company, requiring far more oversight, reporting requirements and transparency than is typical at most growing startups.

In fact, according to a recent Ernst & Young survey, it costs between $1 million and $2 million per year just to operate a public company, due to the new expenses associated with reporting and compliance, as well as higher employee compensation.

And this is on top of the $4 million-plus that it typically costs just to go through the IPO process. The fee for underwriting alone can range from 4-7% of the gross IPO proceeds, plus the associated legal and accounting fees depending on how much a company is raising in their offering.

As a result, going public has to be worth it — really worth it — for many companies to go through the 12-plus month process and pay all of the necessary costs. If they aren’t ready, or don’t properly leverage the process, it could spell a company’s downfall, meaning countless hours of hard work on a dream down the drain.

Here are a few reasons why companies are today waiting longer than ever to go public.

Potential Loss of Autonomy

Once a company is public, it must keep the public and its shareholders happy in order to be successful. This means that the company’s leaders have less autonomy over how they run the business. And, it has the potential to go poorly. If the company’s founders and leaders who have invested years of sweat equity don’t have the same vision as their shareholders, the pressure can turn into turmoil and lead to big problems. Specifically, if shareholders feel as if the company is not acting in their best interest, they can work to appoint new leadership either through shareholder votes or public criticism. By staying private longer, founders give themselves the opportunity to pursue their intended direction for the company without having it muddied by public opinion.

Extra Work for Everyone

Going public is a long process. It starts with analyzing gaps in company readiness and building organizational infrastructure, which often takes as long as two years. The list of things to consider beyond day-to-day business operations when pursuing an IPO include compensation practices, cyber security and data privacy, corporate governance, accounting issues, and communication protocol in anticipation of increased public exposure. Gathering the necessary data for the registration statement should be done at least six months before the initial filing. After a filing, it takes approximately 25 days for the SEC to provide initial comments on a Form S-1 filing. A company’s response typically takes anywhere from ten to fourteen weeks. After all of that, companies typically conduct a roadshow for investors to establish their offering price. This long process requires forethought, planning, and a significant investment of time and energy.

New and Ongoing Requirements

The extra work doesn’t end after an IPO is completed either. Business as usual will be changed forever. Public companies are required to file their financial statements with the Securities and Exchange Commission (SEC) every year in accordance with the United States Generally Accepted Accounting Principles. These must be audited by a certified public accounting firm. In order to be in compliance, newly public companies typically must integrate ongoing company-wide financial controls. This might include making key hires in financial reporting and investor relations.

The Cost Involved

Going public is expensive. According to a survey conducted by Oxford Economics for PricewaterhouseCoopers, 83% of CFOs surveyed estimated spending more than $1 million on one-time costs associated with the IPO. The largest expense is typically underwriting, followed by legal and accounting fees. And, it’s more expensive when you get there. An IPO means new a list of new ongoing reporting requirements, which require more infrastructure.

Exposure to Significant Risk

The truth is, just conducting an IPO does not guarantee success. Rather, it carries with it a lot of risk, especially considering the stock market’s volatility and unpredictability. Going public invites downside risk, or risk of loss of the value of a company’s shares, if market conditions wane. For that reason, the decision to pursue an IPO should be informed by overall market strength and the market’s recent experience with IPOs. In other words, the timing needs to be right. If the IPO doesn’t go the way company leaders hope, it can mean the end of a business rather than a gateway to further success.

The Dreaded IPO Flop

Fund managers are becoming more cautious about buying companies that come to market with sky-high valuations. After all, the evidence is everywhere. SmileDirectClub Inc is now down nearly 60% from its initial public offering price of $23 in early September, Uber is down about 15% from its initial public offering price in May.

For founders and investors who have worked for years on their big ideas without any significant financial return, an initial public offering is an exit opportunity that can result in both cash and a sense of “making it.”

But, more and more companies are realizing that going public is not a goal that should be taken lightly. It’s not a finish line to sprint toward. Taking the time to grow by generating revenue and raising funds as needed in a pre-IPO standing may be the right course for a time.

And that’s all causing a slowdown in IPO filings that’s shaking up the investment market.