For any startup or growing business, an IPO is considered to be a prestigious milestone that will deliver capital for the business and riches for the founders. However, going from private to public is not for the faint hearted; it can change a business significantly and will certainly change the nature of work for its key executives. Long after the thrill of ringing the opening bell has subsided, a new routine of paperwork, regulatory compliance and constant communication with stakeholders settles in. And, for some companies, there is the very real possibility that listing too soon can have a deleterious, rather than advantageous effect.

Alex Hartman, CEO of ASX-listed citizen journalism platform Newzulu, said the question of listing too soon is a good one which he asks himself practically every day. “There are both significant advantages and disadvantages of listing at an early stage; the phenomenon of Australian and New Zealand companies listing too soon is reflective of the lack of venture capital or an investment ecosystem in the region, particularly in comparison to the one that exists in the United States.”

While it is difficult to find an executive in a listed company who will speak openly about the consequences of listing too soon – Orion Health CEO Ian McCrae hinted at the challenges after its first ever AGM, after a long-pondered listing late last year, but declined to discuss them in more detail – Hartman agreed that the phenomenon is by no means mere fancy.

Mark Ryan, CEO of mobile advertising company Snakk (NZAX) agreed with Hartman that operations within the business do change significantly post-listing. Rod Drury, founder and CEO of Xero (listed on the NZX and ASX) provides an alternate view (although he noted that the business is a little different from most other startups as it was listed within a year of its 2006 launch). “Being a startup on the public markets means you can’t stuff up and then fix it in the background. The public nature of it means you do build a better business – but there is a lot of extra pressure on.”

The dark side of a float
Hartman said the difficulty in securing early stage capital can compel company directors to seek a public float potentially prematurely. “[In ANZ] capital is only really available from high net worth angel investors and they are typically only prepared to put up two or three million. If you need capital beyond that…well, that’s the main reason some companies are listing.”

The advantages of listing are generally fairly clear; the disadvantages, perhaps less so. Hartman summed up the latter category: “There’s the cost of the listing transaction itself, rarely less than a million, and then the ongoing compliance costs are significant. As a listed organisation, you’re – quite rightly – held to the same standard as a large company,” he noted. That means the support of experienced, professional staff is required.

There’s a big difference between being a small business with an accountant doing the books and paying tax, versus the rigorous analyses required to get in shape for a listing, added Ryan. “There is a lot of work involved in setting the company up appropriately from a structural point of view, going on to an exchange and issuing shares. And you have to enter the market with a level of financial transparency and reporting rigour which starts from day one.”

Hartman pointed out the time which has to be spent servicing the listing. “The reason I have this job is that I am good at product development; however, I now spend 90 percent of my time on regulatory requirements. Yes, this is a major danger for startups listing, it is the reality. And remember, when the share price goes up, you hear from no-one. It goes down, you’ll hear from everyone.”

There is undoubtedly, stressed Ryan, a deluge of new work which hits the executive team. “There is a definite risk that this can take the eye off strategy, product development and market development. You have to look at the ability of the team to work together. Things can go off the rails quickly, particularly in fast moving environments where a lot of decisions have to be taken every month.”

Dealing with the press
Ryan and Drury pointed to the media, which can and does get things wrong, as a source of some agitation; Ryan’s main beef is that shareholder value can quickly be destroyed on the whiff of a rumour. “This is one of the real risks and responsibilities you face as a listed concern. Anything that doesn’t look good for the business impacts on people and their investments.”

Drury echoed Ryan’s comment. “The media is always looking for things that are interesting and they can pile into you. People with a few minutes look at the company and don’t understand the strategy, so you get a lot of uninformed commentary.”

However, it shouldn’t be taken personally. “This is something you have to live with – though it is weird having people saying negative stuff [about your business] when they haven’t done their homework. The scrutiny is fine, but you become a commodity for content,” Drury noted.

Meanwhile, Hartman acknowledged a constant pressure to announce deals and maintain a news flow. “As a private company you just didn’t have to worry about that. [In terms of product development], you might otherwise not announce things, instead developing them to a later stage before they become visible to competitors. You’re open to scrutiny, and that means scrutiny by anyone, including the competition.”

Insights and cautions
Ryan said those high-growth companies looking at a public float should pay more attention to the potential downsides, which include the reality of constant, ongoing compliance and communications work. “There’s preparing quarterly results, formulating market messages, interacting with shareholders, dealing with the media, getting on top of all the disclosure, half year and full year results, AGMs. Do not underestimate the overheads involved.”

And Hartman has further words of caution. “I wouldn’t advise listing as a standard path for a startup. It is not a panacea to the development of a business. While it can be a good solution in a market where investors are looking for exposure, I’d say explore all other sources of capital and don’t be dazzled by the public market. It can very quickly turn if the business is not meeting expectations.”
However, Drury, who has a track record of founding and selling several successful businesses, including Glazier Systems and AfterMail, doesn’t believe the requirements of a listing (and being listed) are onerous, proffering an answer as simple as it is direct. “I don’t accept that. When you list, you have to have more resources, and you have to expect to do that sort of work.”

He conceded, however, that it is probably different for those accustomed to operating a private company. “You need to add people to help do that [fulfil listed requirements] and add value to the business as well. By hiring the right people and resources, you are creating a much more capable organisation. That’s just how it is, you step up a level, and [by listing] you have the money to build a proper business.”

And if you are going to public, added Drury, ready yourself like this: “Start a blog and social media presence. And develop a thick skin.”

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