💰 When Will My Startup IPO?

NEW STARTUPS

Startups that you can invest in with as little as $100 right now:

⚽️ NK Tabor - A European soccer team gets Man U whiz kids (Wefunder)

❤️‍🩹 Epi One - Faster, more accurate cancer detection (StartEngine)

🦷 Ryca - Dentist-grade toothbrush with 100 brushes per second (StartEngine)

WHEN WILL MY STARTUP IPO?

A year? Six years?? Is it 9 months like a pregnancy??

This is a big question on investors’ minds - the people want to know when they’ll be able to cash in. 

Startups require extreme patience - whereas you can trade a stock the same day as you bought it, startups can take upwards of 15 years(!) to have a liquidity event for investors.

There are many factors that go into when a startup can IPO, and there’s no clear formula for what triggers that stage.

I’ll give a synopsis of some of the factors involved, but first it’s important to know why a startup would even want to IPO. 

WHY DO COMPANIES IPO?

I used to be confused as to why a founder would want to go public.

As a public company, you lose a degree of control over your company. You need to report earnings every 90 days, which can incentivize short-term thinking. Not to mention, going public is an arduous & costly process that incurs high legal and accounting fees.

However there are some benefits and strong incentives to go public.

Early and senior employees are often compensated partially with stock options. Founders face internal pressure from these employees to go public so that they can cash in on their equity positions.

Founders can also face external pressure from early investors, who also want to cash in on their investment.

And even founders themselves need an exit event to happen for themselves to fully cash in.

Going public can also significantly improve the financial position of a company, as it often provides an influx of cash to the business which does not need to be repaid.

Lastly, going public provides a level of prestige that signals the company has ‘made it’.

So there are a mix of factors that incentivize companies to go public, and they tend to pile up as time goes on.

THE IPO MARKET IS EVOLVING

The IPO market ebbs and flows, and the qualifications for prospective companies is always changing.

Below is a chart that shows the median revenue of companies that IPO’d each year.

Since 2012, the median revenue of companies has increased from $160M → $263M. This demonstrates that companies are more mature & larger when they IPO.

Often times, more mature companies = older companies.

The gray circles in the below graphic show that the median age of IPO’ing companies increased to almost 12 years from 2000 onwards.

Okay last one - let’s take a quick look at IPO seasonality.

Companies historically IPO prior to reaching $1B in revenue - in 1980 that was every startup (even when adjusting for inflation).

That’s still the case, but it’s no longer a hard-set rule.

Over 10% of companies IPO’ing in 2023 have over $1B in annual revenue - and when times are tough this has spiked to ~30% (Post Dot-Com Bubble and 2008 Recession)

This is because investor appetite for risk is lower, so only the largest, stable companies will IPO.

TLDR: Hard economic times raise the revenue threshold for going public.

WHY COMPANIES ARE STAYING PRIVATE LONGER

Everyone has their own theory for why companies are staying private for longer - to me there are two clear reasons.

1. More Robust Funding Ecosystem - In the 1900’s, the public markets were the only game in town that could provide funding on a large-scale level. But now, Venture Capital and Private Equity can provide massive sums of capital to companies. There’s less of a need to tap into the public markets when there are ample funding options elsewhere.

2. More Secondary Sale Options - Employees, early investors, and even founders have more options than ever to sell their equity prior to an IPO. StartEngine Private, EquityBee, EquityZen, and Forge all allow people to sell their equity on a secondary market. Equity-holders anxious for liquidity can use this route to sell on their desired timeline, which alleviates pressure on companies to go public.

OTHER FACTORS TO CONSIDER FOR AN IPO

Another thing that confused me as an early investor was when people said ‘oh, the IPO window is closed right now’.

No one would ever explain what that meant, so I will.

Put simply, the IPO window refers to positive economic factors that help a company perform better at IPO.

During strong economies, there is usually high investor demand - and a rising tide can lift all boats.

This allows companies to price their valuation higher, with a greater chance of the share price popping on IPO day.

The risks of IPO’ing outside the IPO window are:

• ‘Selling’ at a market low. You wouldn’t sell your house when home prices are at an all-time low, so why would you sell your company?

• Risk of poor post-IPO performance, which could lead to being de-listed from public exchanges

• Poor post-IPO performance can also damage employee morale and public perception

Outside of the IPO window, I don’t think many investors understand just how long the IPO process itself takes.

For most companies, this is an extensive process that takes between 6-18 months.

For example, a company may be ready to IPO in year 5, but might not pass all the regulatory hurdles until Year 7.

WHEN WILL MY STARTUP GO PUBLIC?

Hopefully by now you realize that going public isn’t a one-size-fits-all process.

Of the various factors, company revenue is what I consider to be the most telling sign that an IPO is imminent.

Being of sufficient size ensures that the company can attract institutional investors and achieve the liquidity needed for a successful public offering.

Going back to the first chart I posted, the median revenue of companies that IPO’d stands at $263M.

This is the median amount, so there are companies with less revenue that are still going public.

I’d say that a company should get to the $150-$200M revenue range prior to going public.

In terms of market timing, it hasn’t been the best time to IPO. Just 54 companies IPO’d in 2023, down from 311 in 2021.

Conditions could be improving however - interest rates might be coming back down and there’s signs of market demand returning. 

To determine when your startup might start looking to go public, see how much revenue they’re bringing in.

Apply whatever growth rate you deem to be reasonable, and calculate when they can hit the $150M-$200M range. 

If the IPO window is open at that time, your startup can realistically think about going public.

Whether they want to, is an entirely different question.

Take Chime for example - the fintech upstart surpassed $200M of revenue in 2019 but isn’t expected to IPO until 2025.

Reddit was bringing in $289M back in 2020 but didn’t elect to go public until this year.

My advice - don’t waste your time trying to pinpoint exactly when a company will go public. As minority investors we’re along for the ride and should spend our time on more productive tasks.