Venture capitalists and bankers like to use the “$100 million revenue” theory as the standard benchmark for determining whether a company is ready for IPO. The rationale is that the $100 million indicates the company is big enough to manage competitive pressure, and big enough to avoid dilution after selling stock to institutional buyers through the IPO. But there are many more considerations than this arbitrary revenue figure to help you determine when to pursue an IPO.
Assess Your Vulnerability
As a private company on a growth track, the fact that you have a significant competitor, one or two very large customers, or that you rely heavily on an existing regulatory regime, technology or platform, won’t necessarily be cause for alarm. However, these risks might rattle investors in an IPO. You’d be well advised to address any of these potential risk scenarios, even if it means slowing your rate of growth. Private companies with less scrutiny have a lot more flexibility than public companies with a lot of investor and analyst attention focused on it.
How Predictable, How Visible?
You can easily have less than $100 million in revenue and still be in a good IPO position as long as you can predict, with laser-like accuracy, what your next quarter or next year is going to yield. Conversely, if you have more than $100 million in revenue but aren’t able to confidently project what lies ahead, this is not a scenario conducive to success during and after an IPO. As a private company, your investors may be thrilled with your achievement of 96 percent of plan for last quarter. A miss of four percent once you’ve gone public can result in plummeting stock, competitor glee, and employee despair.
What’s the Real Growth Potential?
It’s easy to lose sight of the fact that the IPO is not the end of your strategic planning horizon. You may be putting all your focus and energy into attaining that $100 million revenue figure, but it’s important to think beyond the first $100 million and have a plan for how you’ll grow to, say, $300 million. Public investors like and reward that kind of thinking and potential, and even though you may not know today what possible growth directions may be open to you around the corner, experimenting with a few you can envision will help you put together a credible plan before your IPO.
Ever think of a mini-IPO?
IPOs are expensive, and once you’re public, it’s expensive to stay compliant with all the new laws and regulations that affect publicly traded companies. Luckily, there are new ways to publicly solicit money without doing a full IPO. Ask your lawyer about Rule 506(c) generally solicited capital raises and Reg A+ mini-IPOs; you might like what you hear.
Rule 506(c) capital raises require companies to verify that their investors are accredited. Visit us at VerifyInvestor.com for more information.