Increasingly, tech entrepreneurs are dragging their feet when it comes to taking their company from private to public, with a staggering 171 privately funded 'unicorns' currently valued over £1 billion. The most striking example is Uber, the taxi service currently valued at £10 billion, yet no confirmed date for an IPO (although the CEO has claimed it will take place some time in 2019).
The IPO process was developed when most companies were producing physical goods that needed a large injection of capital to take production and expansion to the next level. But in the tech industry, products are increasingly likely to be intangible - like apps or a piece of cloud software - meaning there is less of a requirement for the influx of cash triggered by a public offering. What's more, promising tech startups can increasingly rely on a steady flow of cash from venture capitalists and private equity firms.
What can also prove off-putting to tech companies are some of the requirements associated with an IPO such as disclosing confidential details about the business to the public (and therefore increasing the likelihood that ideas are poached by the competition). Going public is also risky, with two of 2017's best-documented tech IPOs - Snapchat and Blue Apron - finishing the year with lower valuations than their IPO.
But despite this, there have been reports that 2018 is hotting up in terms of tech IPOs - with unicorns Spotify, DocuSign and Dropbox successfully debuting on the stock exchange this year.
For those that do choose to make the leap onto the stock exchange, what does the IPO process entail?
Here, we break down the different stages of the process.
What is an IPO?
Firstly though, what exactly is an IPO? An initial public offering (IPO) is what happens when a company decides to issue stock that can be sold to the public, and other investors.
How does it work?
To 'go public', the company must enlist the assistance of an investment bank, or underwriting firm, to help decide things such as the best type of security to issue (for example, equity or debt securities), the number of shares to issue, the offering price, and timescale for the market offering.
Once a company has decided on an IPO, there are a very specific set of steps they must follow in the UK, all of which are facilitated by the underwriters. These are as follows:
- The company must appoint a team of advisors, made up of the underwriters, lawyers and accountants.
- The company must ensure it qualifies for all the terms of an IPO, including preparing a prospectus containing pertinent information about the company, such as historical financial performance, which is then verified, in addition to other documentation such as ancillary documents including accountants reports and underwriting reports and a full due diligence exercise.
- The prospectus is required by the London Stock Exchange before the securities are added to the official list. (In the US, it's submitted to the Security Exchange Commission before a date is set.)
- The prospectus is also circulated among potential investors.
- A marketing exercise will take place at the same time, where potential investors are contacted about the company and members of the senior management meet with investors to try to 'sell' the company and win their investments.
- After orders for shares have been logged, a meeting between board members will decide on the final price for the shares.
An IPO process generally takes around six months before the company floats on the stock market. Once publicly listed, the company must continue to comply with several obligations, including Listing Rules, Model Code and the UK Corporate Governance Code.
In the UK, 'publicly traded' companies are called Public Limited Companies (PLC).
What is a direct public offering (DPO)?
A DPO is a different form of offering from an IPO - where a company offers its securities directly to the public without the involvement of middlemen such as investment banks or underwriters. Instead, the company underwrites its own securities. This has the consequence of decreasing the cost of capital, so is particularly suited to smaller companies and those with a loyal fanbase.
Falling into the latter category is Spotify, which chose to go public via a DPO earlier in 2018. In this case, the DPO is engineered by an issuer, who decides details like the stock price and the offering timeframe.
In the US, this approach can help dodge the strict regulations and costs implied by the Security Exchange Commission (SEC).