The IPO window is reopening — here’s what startups need to know

Tech startups and high-growth companies are returning to the IPO game — despite mixed results in 2023 and a historic public-offering drought. Prime contenders in the coming months include healthcare payments company Waystar, with media reports suggesting cybersecurity startup Rubrik and micromobility firm Lime are also considering IPOs. And with artificial intelligence startups continuing to make waves in venture rounds, it wouldn’t be surprising to see several companies IPO further down the road.

Yet given bankers’ and investors’ ongoing focus on clear pathways to profitability and positive cash flows, venture-backed companies looking to tap public markets must concentrate on their business fundamentals and execution while clearly understanding the path to future growth.

In what follows, we’ll discuss why some of today’s tech startups are pushing ahead with IPO plans and how to build the foundation for long-term success.

Why go public now?

Get the correct elements in place for growth before your IPO, and your startup can make steady progress as a public company.

It’s an expensive time to be a venture-backed tech company, where if you’re not growing, you’re dying. Budgets are pressed by high borrowing and talent costs. With valuations down significantly from one and a half to two years ago, few high-growth companies want to risk raising a “down round” if they can go into cash preservation mode instead — either until they can tap public markets or until valuations come back so they can raise another venture round as a bridge to an IPO. However, many have already done cuts or layoffs, and the concern is whether they have enough runway to wait it out.

Post-2021, startups looking to IPO — typically late-stage, venture-backed companies that need significant funding to keep growing — might have turned to private capital or debt financing instead of going public. But in today’s economic climate, those fundraising sources are often less available or may be less attractive. For instance, VC funding has slowed and is increasingly oriented toward early-stage startups, while high interest rates make raising capital through debt financing expensive.

Internal forces also drive IPO interest despite the mixed reception for prominent recent listings like Instacart and Klaviyo. Some early-stage startup investors are seeking exits. At the same time, employees who may have been with a company since its early days want to flex their stock options. Such factors, of course, are always in play for fast-growing tech ventures. But companies that may have put IPO plans on ice during 2022’s down market can’t hold out forever.

What’s more, the IPO process can open new doors: For instance, the run-up to the listing and the IPO day serve as an opportunity for media coverage and a marketing event to draw in new customers and investors. IPOs also play a role in mergers and acquisitions, creating a stock currency companies can use to fuel inorganic growth through all-stock deals to acquire rivals or complementary businesses. Before going effective, the IPO process involves establishing a pricing range that can create dual-track interest for private equity or strategic investors who may also consider acquiring startups that could bolster their own business or portfolio.

According to Renaissance Capital, these factors contribute to the gradual thawing of the IPO market after 2022’s historic lows: There were 82 U.S. IPOs in the first three quarters of 2023, a 28% increase compared to the same period in 2022. The SPAC merger bust is mainly behind us, and recent IPO success stories include the 2023 debuts of biotech startups Structure and Genelux, whose post-listing stock prices have increased by more than 300% and 100%, respectively.

Key insights for pre-IPO startups

Be ready to execute your business plan

As the past two years have made clear, the frothy IPO market of 2021 — with its easy money and investor enthusiasm — is far in the rearview mirror. These days, investors are laser-focused on the path to profits and cash flows. It’s not enough to chart revenue growth, promise international expansion, or grow in tertiary markets.

Consequently, many bankers who underwrite IPOs are now looking for metrics that show positive traction for three quarters before the IPO event, such as acquiring larger customers and moving up the market, customer retention, and diversification of industry and customer base. Some also want companies to clearly demonstrate they can be cash-flow positive within a short period after becoming a public company.

Ensure that the suitable systems, processes, and people are in place ahead of the IPO

You need quality data to forecast the key metrics investors demand from a public company. That can be a challenge for fast-growing startups, which tend to have disparate systems that may not effectively “speak” to each other — and may not be able to stand up to post-IPO volume. Limit the number of financial systems you use, and ensure they have good APIs (application programming interfaces) to help smooth transitions as you consolidate.

With the correct data, thinking carefully about which key performance indicators will best serve your company in the future is critical. After all, once those metrics are in your registration statement, analysts and investors will expect you to keep them in place. Reaching a consensus may involve internal debate and discussion. Once you’re aligned, ensure those metrics are well-defined and effectively communicated so you can tell a consistent story.

Provide enough time to rehearse what it will be like to be a public company, from drafting mock earnings releases and 10-Q filings to preparing for the rigor of that first external audit. For example, startups need to start reliably “closing the books” quarterly — not just for accounting reasons, but to ensure they’ve got an accurate snapshot of the business.

You can’t predict your future stock price — but you can control performance

Going public can sometimes force business leaders into a short-term mentality amid investor pressure to show growth each quarter. Such thinking can prioritize quick wins over the more strategic, long-term investments needed to spur sustained growth.

Remember, most public technology companies don’t find success or create substantial value until the later stages. The elements that can fuel that trajectory include diversification, inorganic growth through M&A, and international expansion. Get the correct elements in place for growth before your IPO, and your startup can make steady progress as a public company, hitting milestones along the path to long-term success.