Initial public offerings (IPO), the process in which a company sells its shares to the public, are on a roll this year. Just look at the sizzling performances of companies like Dropbox (NASDAQ:DBX), Zuora (NYSE:ZUO), DocuSign (NASDAQ:DOCU) and Avalara (NYSE:AVLR). Demand for each initial public offering has been quite strong.
In light of this situation, it seems like a good bet that we’ll see other high-profile companies hit the markets in the coming months. The buzz is that Uber, Airbnb and Lyft are looking at pulling off their own offerings.
The IPO, however, is not as straightforward as they seem. There are many key factors in the process. Keep in mind that IPOs are highly regulated by federal laws, which seek to ensure investors get the information they need to evaluate the offering.
So let’s take a look at the main steps of an IPO:
Initial Public Offering Step #1: Preparation
Before selling shares to the public, a company will usually spend several years — and millions of dollars — to get ready. In order to carry out an IPO, companies must have strong management teams and boards of directors. The management teams and the boards often have experience with public companies.
A company undergoing an IPO should also have a solid accounting and reporting system. Furthermore, such companies must have large growth opportunities, and their annual revenues should be at least around $100 million.
In other words, the bar is set high for an IPO. That is why there are only a relatively small number of deals each year.
Initial Public Offering Step #2: Selecting Advisors
When a company decides to carry out an IPO, several advisors — such as attorneys, a financial printer, and an investor relations/PR company — will be brought on board. However, the process will be lead by underwriters or investment banks. Several of these firms may lead each IPO. Additionally, a large group of other financial firms will help sell the shares.
The lead underwriter will help carry out the following processes:
- Develop a timeline.
- Engage in due diligence.
- Draft the registration statement, which is the document that is disclosed to investors.
- Develop the pitch deck.
- Identify the relevant investors.
- Determine which market to list on (usually the Nasdaq or the New York Stock Exchange).
All of these activities are time-consuming. Note that they could easily take a few months to complete.
Initial Public Offering Step #3: The Roadshow
After the registration statement is submitted to the Securities and Exchange Commission, several amendments will often be made. After the agency accepts the statement, the company can then market the offering through a road show.
During the road show, the company’s senior managers will spend a couple weeks making presentations, usually in major U.S. cities. But presentations may also be made in Europe and Asia.
The road show will enable the lead underwriter to assess investors’ interest in the IPO. The firm can then set the number of shares to issue, as well as the price range. As the roadshow progresses, the valuation of the deal could rise, indicating that it has strong momentum.
You can find videos of roadshow presentations at www.retailroadshow.com. It’s certainly a great resource for IPO investors.
Initial Public Offering Step #4: The IPO Hits the Markets!
Once the roadshow is complete, the company will finalize the pricing of the deal. This is done on the evening before the IPO is launched. And yes, the meeting can be tense. The company’s senior managers will want to get a high price, whereas the investment bankers will be mindful of investors, who want an attractive valuation.
As for the day of the IPO, it will be a whirlwind for the senior managers. They may open or close the markets, such as by ringing the bell on the NYSE, and do many media interviews. An IPO is definitely a huge achievement for a company.
Yet the IPO is still really just the first part of the journey. Going forward, the company will need to execute its business plan, fend off the competition, and find ways to keep its growth elevated. To accomplish those goals, publicly traded companies need a top-notch management team.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.