The dream of many a private company shareholder is to be publicly traded. The motivations for being a public company can be wide and varied. Some may desire public status for the prestige (which is always highly overrated). Others may wish to have the ability to raise capital for business growth needs. Others still–especially investors–are motivated by the liquidity that going public can bring. Going public certainly has its risks, but there are instances when going public, even as early as the startup phase, can be a huge boon for both steady-state and emerging companies. What follows are some of the characteristics that can make going public a very viable option for private companies.
Barriers to Entry
Businesses with both natural and artificial barriers to entry make better candidates for going public. Some examples of barriers to entry might include Intellectual Property (like trademarks or patents) or even government regulation. Natural barriers, while more rare and harder to defend, are also helpful. Such barriers might include scale and network effects or tacit knowledge that may take years to replicate, if at all. Both natural and legal barriers to entry help to drive market leadership within niches that make for great public companies.
Some of the best barriers to entry are what I would consider natural barriers. Both Wal-Mart and Amazon are good examples. Anyone can easily build a website or open a retail store, but both Amazon and Wal-Mart now maintain large networks, logistical expertise and internal operations that would be difficult. This may seem like a poor example as both firms are already leaders with public stock, but it’s this drive and these very characteristics that formed early on in their businesses that keeps them separated from the competition.
Existing Network & Potential Shareholders
As we’ve previously discussed, winning market support for reverse mergers and self-filings can be very difficult. Without broad, existing market support and big media hype over an IPO scenario, it can be difficult to win support for main street businesses that have stock in the public float. Companies that do well in spite of such challenges include business based on network marketing, companies that have large reseller networks or even a business with large numbers of Twitter followers.
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Somehow the company needs to build market support for share purchasing and a viable public float. Building a base of shareholders or a network of distributors isn’t done overnight, but it’s absolutely essential to have a successful public (whether done traditionally or with a reverse merger). Firms with existing networks of buyers or suppliers have a leg-up and typically do very well when their shares finally become registered and trading.
Existing Revenues & Profit
Not all public companies are profitable. Take Twitter for instance. They’re still running with losses. Eventually, investors will demand profitability, but it’s not necessarily profitability that drives a private company to seek public status. In some cases, growth in revenues supersedes the need for bottom-line profits. The expectation is that at some point the growth will slow, fixed costs will be covered and the business will become very profitable.
Some of the best private-to-public company prospects include companies with existing, and preferably growing revenues. While such companies may not yet be profitable, steadily growing revenues are a signal to the market that the business is headed in the right direction, especially if management can paint such a rosey picture to investors and potential investors on quarterly and annual reports. Having this story before going public is much better than the 1999 IPO market that simply included a business plan and a domain name (think Pets.com).
Going public is certainly not for every business. Not only is asking the right questions key, but it’s important also to understand the nuances of the process itself. Dealmakers may try to fit the proverbial square peg businesses into the round hole shell companies. In some instances, it may be most advantageous to go public without a reverse merger at all. Ultimately doing what is best for the long term objectives of the business and its shareholders will be the dominating factors in both the “why” and “how” questions revolving around going public.
