IPO or Bust
Choosing which tech startup to join is always a tough decision to make. You ask yourself a lot of questions: Does it have the right management in place? Does it have a solution that solves a big problem? Is the culture right for me? Do they have the right VC's backing it? Is this company going to make it? etc. A lot goes into the process and it's always a big risk as there are so many factors involved that you can't control or predict. If one of your goals is to work for a tech startup that is going to IPO, I have an interesting statistic to share with you. Or maybe you are already at a tech startup and are speculating if your company will ever have an IPO exit. This stat will shed some light.
HOW IPO's WORK
I think it's important to first understand how the IPO process works. According to CNBC, the IPO process takes roughly four to six months and is a grueling process for upper management to endure. There are 4 major steps in the Initial Public Offering process you should know about:
1. Choose a Booking Manager
The company first has to decide on an investment bank, aka "book running manager" to lead them through the process. For example, when I was part of Okta during our IPO in 2017, our leadership chose Goldman Sachs and J.P. Morgan Securities as joint booking managers to help guide us through the rigor.
2. S-1 Filing
The company then files a confidential document called the IPO prospectus with the Securities and Exchange Commission (aka S-1 filing). That filing is a sneak peak for investors into everything they should know about the company from risk factors to financial statements. This document is eventually released to the public for viewing so if you are ever wondering how many millions of dollars your CEO is worth, now you will know!
3. IPO Roadshow
After the S-1 filing, the company goes on a “road show” which gives investors the opportunity to meet executives at the company and ask them questions. Think of the IPO prospectus as a resume and the road show as the job interview. The Street defines the roadshow as when investment bankers representing a private company about to go public travel the country to meet with investors so they can line up buyers for the new shares the company will issue. A business typically aims to reach a triple oversubscription which means it has 3x the interest in its shares then they will make available. The more demand, the higher their IPO offering and more valuable the company is.
4. Determine Stock Price
On the last night of the road show (besides an elaborate dinner and some high-end drinks), the investment bank and company execs determine the price of their stock and to whom they’ll allocate the shares to. Typically, 85% of a company’s shares during an IPO are sold to institutional investors. In other words, your Aunt Bethany most likely isn't going to get a piece of the action until trading day.
"A business typically aims to reach a triple oversubscription" - CNBC
HOW MANY COMPANIES GO IPO?
I think it's also important to mention how rare it is to go IPO to begin with. This is an extremely difficult thing to do for various reasons. According to NVCA.org, the VC funding ecosystem backed 10,400 companies in 2019. To put this in perspective, 159 companies went public last year and only 42 of those were tech companies. Between 2000 and 2018, an average of 110 companies went public each year, compared with more than 300 a year between 1980 and 2000. It truly is an amazing feat.
Below is a look at the number of IPO's in the U.S. from 1999 to 2019 according to Statista:
With the global pandemic and the strain it has had on the economy, you can only imagine that