Going public is a big step for CEOs and CFOs. The decision to become a publicly traded company can be a daunting task for the senior management of the company. Consequently, companies typically enlist the services of an investment bank to help them navigate the public offering process. This includes advising on all aspects of the public markets including assessing the public market value of the company, determining who may be the companies target investors, as well as how much demand is likely to come from investors at the proposed valuation. As such, when taking the plunge to go public, company management should consider these key questions to keep them on track.
Who is investing in your company? Typically on an IPO the lead underwriter or “bookrunner” will determine the split between shares allocated to institutional investors and those to retail investors. Historically this split has been tilted toward institutions with the overall retail allocation typically comprising a small percentage of the overall deal. When it comes to the retail component, the traditional model is that the syndicate firm allocates shares to their financial-advisor network who in turn allocates to their retail clients. This can be referred to as a “financial advisor led” distribution model. The financial advisor typically reserves these shares for their very best clients who most often are high net worth investors. This model has worked well for many years however it limits the distribution of shares to predominantly high net worth investors, leaving the main street retail investor out in the cold. However, much like we have seen in other areas of the economy – whether it be in on-demand ridesharing (Uber & Lyft) or marketplace lending (Lending Club, Prosper) – advances in technology has enabled companies and underwriters to tap into a broader investor segment and demographic and offer the opportunity for Main Street retail investors to get access to shares in the IPO. This new distribution channel can provide valuable access to a new and untapped demographic segment, including the highly sought after millennial and Gen-X generation who to date have largely been shut out of these offerings. In many cases these individuals know and use the companies products and services everyday and thus tend to be more long-term shareholders helping to mitigate potential market price volatility.
What do you know about your investors? It’s important that you know who your investors are and what drives them. Research conducted by Bain & Company shows individuals that are both users and shareholders of a product or service are more likely to use more of the product and also recommend the company to others. These investors also tend to be longer term investors, which is a benefit to having them as a shareholder early on in the company’s public life. In addition, the ClickIPO platform allows direct access to these investors who participate in an IPO through the app creating on ongoing communication channel for the company. Utilizing technology to send notifications to your tech-savvy investors and engage them in podcasts, webcasts and studies is a great way to continue the investor relationship. Having an ongoing dialogue and channel to reach your investors can be a valuable tool to keep your shareholders informed and help mitigate shareholder turnover.
Have you considered the availability of direct share programs? As you decide to go public, you may be considering options to allow employees, friends and family of the company to participate in the IPO. Directed Share Programs (DSPs), also commonly referred to as “friends and family” programs, allow just that. When filing for an IPO, many companies reserve 5-10 percent of the shares of the offering for the DSP. ClickIPO’s platform can help facilitate a broad based DSP and thus provide access to those individuals that have been instrumental in the success of the company. Through the DSP, these individuals are offered the opportunity to get shares in the IPO at the IPO price alongside of many of the large institutional investors. ClickIPO’s platform can be used in the execution of these programs and thus provide access to employees and friends of the firm that may not align with the underwriter’s typical investor profile. This means more of your employees, friends, family and key vendors can access highly coveted IPO stock.
With the IPO landscape changing and new technology making it increasingly easy for Main Street investors to participate in public offerings, it’s important to understand all the options for going public. ClickIPO can help you not only reach the untapped market of millennials and Gen-Xers, but also engage the family and friends of your company as you take the next step for your expanding business.
Risk of Investing in Initial Public Offerings (“IPOs”)
There are specific risks in investing in an Initial Public Offering (“IPO”). Among other things, the stock has not been subject to market valuation. Those risks are described at length in the prospectus, and we urge you to read the prospectus carefully to understand those risks before investing. An IPO is the first sale of stock by a private company to the public and may not be suitable for all investors. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded. IPOs are a risky investment. For even experienced investors, it can be difficult to predict what the stock will do on its initial day of trading and in the near future because there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, which are subject to additional uncertainty regarding their future values. Read more information regarding the significant risks associated with investing in IPOs.