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IPO: A way to exit, not just for unicorns

Why an IPO at all?

There are many reasons why many start-ups are considering the Königsweg IPO (abbreviation for Initial Public Offering).

We have summarized what we believe to be the most important reasons for an IPO below and then explain them in detail:

  1. Easier access to fresh capital
  2. Increased liquidity of the company shares and exit for the old investors
  3. Transparent company valuation
  4. Branding & Marketing
  5. Attractiveness for employees

Easier access to fresh capital

By going public, a start-up can address significantly more potential investors than with series A, B or C financings. Many institutional investors, such as investment funds from banks or insurance companies, can only buy shares in listed companies in accordance with their investment regulations.

Increased liquidity of the company shares and exit for the old investors

Before the IPO, it is usually not easy for investors to sell their shares - the number of possible buyers is rather manageable. A private equity investment is therefore usually rather illiquid. This changes when the company goes public through an IPO. Shares can then be sold relatively easily - provided there is sufficient liquidity on the stock exchange. The IPO thus also represents an exit option for existing investors.

Transparent company valuation

Determining the corporate value of a start-up that is not listed is not easy. The value of the last round of financing is often used as a reference. It is difficult, however, to determine the value between the financing rounds. If, on the other hand, a company is traded on the stock exchange, the company value is determined in real time. In addition - at least in theory - the company value should increase as a result of the IPO, since shares are now freely tradable and this is usually rewarded by investors (compared, for example, to private equity investments, which cannot simply be sold).

Branding & Marketing

An IPO is often associated with increased media awareness, as the press, for example, also becomes aware of the IPO. The media report on the new company - this is how new customers and / or business partners may find out about the offer.

Attractiveness for employees

After an IPO, there is the possibility to use employee participation programs to give employees a greater share in the company's success and thus to bind them more closely to the company.

What are the requirements for the IPO?

With regard to the timing of a possible IPO, two factors are particularly relevant:

  • The fulfillment of the requirements for admission to trading on the exchange
  • The strategic question of whether the “right” time has really come

In addition to the legal and public law requirements, every exchange has its admission and inclusion criteria that a company must meet (and later comply with) in order to be admitted to exchange trading. In addition, there are authorization requirements that must be met on an ongoing basis.

It should be noted that some exchanges - such as Deutsche Börse, for example - operate different stock exchange segments, for which different levels of requirements apply. For example, the formal inclusion and follow-up obligations are requirements for a listing in the segment for small and medium-sized enterprises (SME) Scale - tailored to the needs of SMEs.

In addition to the legal requirements, every start-up should also think about the ideal time. In particular, market maturity and internal processes should be questioned. Once you have gone public, you are in public and are critically observed. In particular, capital market communication must be increased significantly. This also entails greater effort.

If a start-up does not yet make a profit when it goes public, for example, but shows strong growth rates in the issue prospectus, you will be measured against the forecasts. It is all the more important to set up professional controlling, reporting, risk management and an investor relations team at an early stage to take over communication with capital market participants.

Where does the IPO take place?

If the question of whether an IPO should take place was decided positively, the next step is to decide on which exchange the exchange listing should take place. The following questions are relevant when choosing the stock exchange:

  1. Stock exchange
  2. Stock market segment
  3. Issuing costs
  4. Strategic importance of the target market
  5. Investors

Stock exchange

Usually the company will choose a stock exchange in the country in which the company is based. But this does not necessarily have to be the case. If the strategically important target market is in another country, the IPO can also take place in another country. Costs also play an important role in this decision.

Stock market segment

Most stock exchanges have different segments, each with different transparency requirements. At Deutsche Börse - as an example - there are two market segments with three different transparency requirements. The regulated market segment is regulated by law - admission conditions and transparency requirements are specified by the EU. The open market, which has been called "Open Market" on the Frankfurt Stock Exchange since October 2005, is regulated by the stock exchanges themselves. Incidentally, over-the-counter companies are not considered to be "listed" in the strict sense of the word.

Issuing costs

The costs for an IPO can amount to up to 10% of the total issue volume. Therefore, they also play an essential role in the choice of the stock exchange. The candidate must ask himself, among other things, where relevant banks are located, where roadshows can be held most effectively and what the follow-up costs from the now increased transparency obligation will look like after the IPO.

Strategic importance of the target market

Where can the visibility of an IPO provide strategic support for the product?

Investors

When selecting the stock exchange, the candidate should also ask themselves where the really important investors, who are to be addressed with the IPO, are located. However, the importance of this aspect has decreased significantly due to advancing digitization.

How does the IPO take place?

If the company’s shareholders and management have decided to go public, numerous steps are necessary before the company's own shares can begin trading on the regular market. We have summarized the most important steps of an IPO below:

  1. Choice of issuing bank
  2. Due diligence and prospectus
  3. Roadshows and Equity Story
  4. Bookbuilding process, issue price and allocation
  5. Initial listing & regular trading
  6. Reporting & Investor Relations

Choice of issuing bank

The IPO process begins with discussions with investment banks who will accompany and carry out the IPO. Usually a lead bank (consortium leader) is determined as part of a beauty contest, which then coordinates the share issue with other banks belonging to the consortium. Usually between three to five investment banks receive the mandate.

Due diligence and prospectus

The next step is a detailed examination of the company as part of a due diligence. Legal structures are examined as well as e.g. market opportunities and risks. The entire analysis flows into the issue prospectus - often also called the stock market prospectus - which is necessary for a stock exchange listing.

Roadshows and Equity Story

The stock exchange prospectus is then made available to potential investors - e.g. investment funds - by the respective investment banks. Analysts from the respective banks then present the equity story (a convincing company presentation is very important!) And obtain feedback (especially on the proposed company valuation) from potential investors as part of the “investor education”. This is usually followed by a meeting between management and potential investors.

Bookbuilding process, issue price and allocation

Based on the feedback from investors, the price range for the share and thus the range for the company valuation is determined by management in close coordination with the syndicate bank. Investors then have the opportunity to subscribe for shares within the price range within the subscription period. After the subscription period has expired, the issue price is determined as part of the bookbuilding process and the shares are allocated. The issuer has a say in this and can thus influence the allocation.

Initial listing & regular trading

After the shares have been allocated to the new co-owner and booked into the custody account, regular trading on the stock exchange can begin.

Reporting & Investor Relations

The real work of the investor relations team now begins with the stock exchange listing. In addition, the issuer must ensure that the legal requirements - such as reporting obligations - are complied with.

How an IPO actually works in practice is explained using the example of the online fashion retailer Zalando.

Continue reading

Seven tips for the IPO

Jens Schleuniger, founder and managing director of Für-Gründer.de, used to be a manager at large fund companies. Finally, he gives tips for a successful IPO.

  1. Wait for the right time
  2. Investors need to understand the business model and structure
  3. Free float of less than 10%? Just don't!
  4. Apply the assessment realistically.
  5. Build an investor relations team
  6. Make forecasts cautiously optimistic
  7. Founders should stick with it for the long term

# 1 Wait for the right time

An IPO is a very important milestone for a young company, which on the one hand can bring the company a big step forward. At the same time, an IPO also ties up a large part of the resources that a start-up programmed for growth can possibly only raise at the expense of its core business. This factor needs to be weighed carefully.

# 2 Investors need to understand the business model and structure

Warren Buffett, arguably the world's most successful investor, only buys shares in companies whose business model he understands straight away. And so do many other investors, like Buffett. The more explanation you need and the more difficult it is to understand your own business model, the more difficult it is to convince investors to buy shares. Therefore: Explain the business model as simply and understandably as possible. This also applies to the corporate structure. A complex holding structure with various sub-holdings tends to be difficult for investors to understand. When in doubt, it is better to stay away from it.

# 3 Free float of less than 10%? Just don't!

The free float is the proportion of all shares in a company that "flows freely" in stock exchange trading, ie can be traded. The higher this proportion, the easier it is for investors to buy and sell their paper at a fair price, i.e. the more liquid the trade is usually. The higher the free float, the less volatile the share is and the more likely investors will be willing to invest in the shares.

# 4 Realistically approach the assessment

As part of their IPO, stock market aspirants should definitely resist the temptation to get the most out of the IPO by rating them too high. That doesn't mean you should waste money going public. But the valuation at which the shares should be marketed should be as realistic as possible so as not to gamble away investors' trust. Because nothing is more damaging to the company's reputation than a flopped IPO in which the bookbuilding range has to be adjusted downwards several times due to insufficient demand and the shares are then still placed at the lower end of the range. Then the stock market launch will probably not be crowned with success either.

# 5 Build an investor relations team

Continuous capital market communication is also important after the IPO in order to bind investors to your own company in the long term. This is important, for example, when capital increases are to be carried out, but also to ensure stable share price development. But regular and reliable company information is also fundamentally useful and increases reputation.

# 6 Be cautiously optimistic about forecasts

Forecasts about future business developments should be realistic, but not overly optimistic. If corporate goals are announced too grandly and then cannot be achieved, investors will be disappointed. Nothing weighs more heavily on the stock market than disappointed investors, which is also reflected in the share price. Another rule is that broken trust is very difficult to rebuild - so you should be realistic about your forecasts.

# 7 Founders should stick with it for the long term

This tip applies to both operational management and corporate participation. Because if the founders sell the majority of their shares immediately after the IPO, this sends negative signals to the other investors. If, on the other hand, the founders hold on to their stake or go along with the IPO, this signals a great deal of trust in their own business model and in the growth prospects of their own company.

Author: Für-Gründer.de editors

As editor-in-chief, René Klein has been responsible for the content of the portal and all publications by Für-Gründer.de for over 10 years. He is a regular interlocutor in other media and writes numerous external specialist articles on start-up topics. Before his time as editor-in-chief and co-founder of Für-Gründer.de, he advised listed companies in the field of financial market communication.