Raising capital during the course of a young company’s life is an integral part of its path to success. From angel, or “seed”, rounds to Series A, B and C, crowdfunding or Regulation A rounds, the capital raising process can evolve quickly and could ultimately culminate into it offering its equity to the public through an initial public offering, or IPO. Along the way, a company’s financial preparedness needs to continuously adapt toward the growth of the business and the requirements of such a major event. But how does a company know if it’s IPO ready?
The first thing a company needs to ascertain is whether it appeals to the investing marketplace, which institutional and retail investors. Is it in an industry the investing public finds exciting? Will investors buy into the IPO?
If it’s a $300 million revenue company making widgets, it might not be a great IPO prospect. If it’s a technology company with minimal revenue in a hot sector, it might still be very exciting to investors. Investors want growth. They want to see a trajectory in the shape of a hockey stick, not single-digit annual growth rates.
Investment bankers take companies to investors and know what they can sell and what investors will buy. In the process, they can assess the market’s temperature: hot or cold.
Next, companies need to look at themselves from the 30-20-10 vantage point: That’s a view from 30,000 feet up, 20,000 feet up, and 10,000 feet up.
The 30,000-foot view is the macro outlook, a look at the industry as a whole. The company needs to be aware of competitive advantages and industry trends that could have a systemic impact on growth and the potential changes in its needs for capital.
The 20,000-foot view is a broad overview of the company. The owners need to understand how the company’s structure relates to how it will be perceived as an IPO. They also need to have their finances, accounting, and compliance in order.
Is this company a single entity? Then it’s a simple process. But many companies are multiple entities. Where are these entities located? What are their structures and their ownership? Ownership structure can complicate the process and dictates a lot of the preparation for the IPO process. Are these wholly-owned subsidiaries or consolidated? Are they majority-owned or minority-owned?
How have the owners been financing the company so far? Has it been friends and family or institutional? Has it been with equity or convertible debt, and is there preferred stock, warrants, or options? What are all of the terms of these financings so that the company has a capitalization that is structured properly for future investment?
Furthermore, the company needs to understand these issues so it can accurately estimate how complex the audit will be and much time it will take.
Audit-ready financials and regulatory compliance are critical components of the IPO. The company will need to appoint an auditor that will conduct reviews of all material documents and perform detailed testing of financial statement transactions. The financial statements then need to be prepared and incorporated into a registration statement that is filed with the Securities and Exchange Commission, or SEC, who will then examine the company’s disclosures.
Depending on the financial and regulatory environment, there are also specific hot topics with the SEC where they’ll have added focus, including revenue recognition, complex financial instruments, related parties and others. What components make up the company’s revenue and how is it recognized? Revenue needs to be assessed, tested and documented so that the company can confirm that it’s recognizing revenue appropriately under the accounting standards.
For complex financial instruments, what are all of the elements of the company’s equity that could have an impact on the financial statements? How and what are the methodologies under which they are they valued? Are there contingent liabilities not being accounted for on the balance sheet?
With related parties, who are they and what role do they have with the business? What agreements does the company have with these related parties, are the agreements at arm’s length and have they been properly disclosed?
Then there are some rapidly emerging additional requirements such as ESG – environmental, social and corporate governance. This climate disclosure rule proposal from the SEC on March 21, 2022 opens the door for the broadest federally mandated corporate ESG data disclosure requirement ever in the U.S. The aim is to improve the consistency, quality and comparability of company-reported climate-related risks. Is the company preparing for these disclosures?
During the 10,000-foot view, the company needs to take the micro view – a close, intimate look at its accounting and financial processes. Does the company have standard processes and procedures? What systems are in place to create monthly and quarterly financial reports? Are they closing the books on time? If it takes too long, why? What are the fundamental issues causing a delay? Is the company adequately staffed to scale its financial operations for growth but to also manage the reporting requirements of being a public company?
A lot of company owners may think they have everything sufficiently prepared and staged to prepare for an audit and IPO, but they don’t. This is actually quite common. At Eventus, we do a gap assessment of companies. We look at where they are and the gap to where they need to be – and then we help them bridge that gap. We go into the foxhole with the company and walk them through the process. We help them design, implement and maintain their financial processes in order to meet the standards of an audit and the SEC reporting requirements. We are an integral part of the work with the bankers, lawyers and auditors to complete and file the registration statement. At Eventus, we are engaged in every step of the process to identify and solve financial challenges to help the company get into the financial shape it needs to access the next stage of growth capital and, ultimately, effect a successful IPO.
