Unicorns and their path to IPO

Unicorns-and-their-path-to-IPO(source: SaaS Industry)

At a Glance

Unicorns were formerly depicted by ancient Greeks and Romans as very quick and light on their hooves, with a horn treasured by merchants and investors. It’s a description that may also be used in today’s unicorn businesses. These privately-held businesses haven’t been around for more than ten years. Despite this, they have already surpassed the $1 billion mark. They’ve done it most often by acting as disruptors, flipping marketplaces or whole sectors on their heads.

Each entrepreneur and company’s route to unicorn status is unique. Still, they all ultimately reach an exciting but challenging milestone: the point at which the entrepreneur must assess the company’s fundraising and exit possibilities. The option to remain private, sell, or go public for many unicorn firms is typically complicated.

The real benefit of an IPO is that it may supply unicorn firms with funding in numbers that they won’t be able to get otherwise. It also allows unicorn firms and their founders to reward and retain the talent that has helped them achieve their current success. It will enable investors to see a return on their investment and raise brand awareness and expand market opportunities.

Going public necessitates a governance framework and a degree of professionalism that establishes the firm as a credible market player. However, unicorn firms may not be prepared for a new level of scrutiny from investors and authorities.

Two Routes

There are two major stock exchanges in the United States, the New York Stock Exchange, and Nasdaq Stock Exchange. There are specific rules and guidelines that a company must follow to get listed on either of these two exchanges. 

New York Stock Exchange

The New York Stock Exchange (NYSE) is a global market that is part of NYSE Euronext, including American and international stock exchanges. It is via this market that about 80% of American securities are traded. A corporation must fulfill specific financial and non-financial criteria to be listed, such as the number of shareholders, earnings, and stock price.   

  • Have More than 400 Shareholders
  • Meet the Basic Earnings Standard

Global Considerations

Nasdaq Stock Exchange

The Nasdaq Stock Exchange (NASDAQ) is a global electronic stock exchange where you may buy and sell stocks. The National Association of Securities Dealers (NASD), currently known as the Financial Industry Regulatory Authority, founded Nasdaq (FINRA). On February 8, 1971, the market was established to allow investors to exchange securities on a computerized, fast, and transparent system. Based on its underlying fundamentals, a firm can obtain listed on the Nasdaq in four ways.

  • The firm must have earned a total of $11 million in the previous three years, with no one year being a net loss.
  • In the previous three years, the firm must have had a cumulative cash flow of at least $27.5 million, with no negative cash flow.
  • If an entity’s average market capitalization in the previous 12 months is at least $850 million and revenues in the previous financial year are at least $90 million, it can avoid the cash flow requirement.
  • If an entity’s assets are at least $80 million and its shareholders’ equity is at least $55 million, it can skip the conditions mentioned above and reduce its capitalization to $160 million.

Direct Listing 

As an alternative to going public, some companies consider a direct listing. Unicorns might use a direct listing as an intelligent path to the public markets. Unicorns can list existing shares without having to issue new ones. A direct listing, on the other hand, isn’t for everyone.

Unicorns might benefit from a direct listing because they already have a strong brand and a high private market price. A direct listing can help to establish a brand and increase trust in a unicorn’s equity story. It also has the option of proceeding to the second phase of raising more capital by issuing new shares.

Is an IPO the best long-term strategy?

It isn’t easy to quantify the value of going public because the reasons for doing so might be as complex and varied as the unicorn firms themselves. If we look at it only from an economic standpoint, based on price and first-day performance, the answer is often yes.

In the long run, success is determined by two factors: if the founder’s initial personal goals are realized and if the firm provides value for its stakeholders. The former is simple to quantify. In terms of the latter, IPO investors will assess value creation by looking at the promises made during the IPO, the effective use of IPO money, and management’s confidence and performance, all of which influence the stock price.

Additional performance indicators, such as increased brand awareness, better talent attraction, or meeting stated growth rates, will also influence an IP’s perceived worth.

Five Pointers

There are five tips with which companies can improve their choice going the IPO way. These tips will ensure that the route they gave chosen pays off in the future,

  • Maintain adaptability
  • Invest in infrastructure, people, and processes
  • Select the best advisors.
  • Consider attracting key investors for reference selling
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