For most executives, working through IPO represents the culmination of a long, successful journey from start-up to market-proven success. Before having a successful IPO, it is vital for the company to demonstrate a handful of criteria to attract potential investors from the buy-side. Here are nine ingredients to increase the chance of IPO success and solid performance in the long term.
1 Growth Metrics
The first thing that potential investors look for is growth metrics. In the case of SaaS companies, their value is based on revenue growth over any other type of financial metric. A high growth rate for an investor will indicate that new customers are buying, existing customers are retained, and there is a low churn among existing customers. Other metrics include users, bookings, gross merchandise value, and billings.
Asides from proving that you can grow, your business must also show investors that it can grow at scale. Investors are interested in companies growing at a sustainable rate despite what’s trending or random events. Sustainable growth assures the investors that the company has a plan for solid revenue growth in the long term.
When measuring profitability, investors focus on specific metrics. Companies with certain amounts of debt or large investments in fixed assets will need EBITDA. If a SaaS business with subscription-based revenue models, investors check for free cash flow, although those without these models will do best with robust net income.
Although this might seem an obvious one, it’s still worth mentioning. Investors always check the attractiveness and competitive advantage of the product or service a company has before considering investing in them.
Investors also look at your competitors, so you should conduct in-depth competitor research and analysis while getting IPO ready. When a market has a lot of competition, it’s hard to select who leads that industry. Thus, your business needs a distinctive business model that makes it stand out.
One of the reasons companies want to do an IPO is that they need access to capital, but there’s a dilemma since they need money to fund the business. Potential investors always check the balance sheet to see if your company has enough cash or would soon be making enough cash to take care of business through cash flow forecasting. It also helps to learn how to forecast cash to reduce uncertainty. Thus, you need a cash forecast and business plan to prove your cash flow.
7 Market Size
Potential investors look out for a huge and growing addressable market. In this type of market, your company has a higher chance of becoming a large franchise, and you won’t have to penetrate the market deeply. Businesses in a large market also have higher growth rates in the long term.
8 Unit Economics
Investors will check if you have good unit economics before having confidence in your long-term success. You may already know this as CAC (Customer Acquisition Cost) and CLV (Customer Lifetime Value). For a brick-and-mortar shop, you should also consider customer retention rate or churn rate, number of purchases per month, and the average cost of each purchase.
Any potential investor would assess the financial leader of the company before deciding to invest. Not just the company’s economic leader and/or its public image, the management team must prove that they can be truly trusted to bring results.