After a two-year lull, startups are once again preparing to test public markets, with a particular focus on Africa's IPO hopefuls. Notably, when tech firms raise significant amounts at the Series C stage, it typically triggers an 18-month countdown to an initial public offering (IPO). The process involves a company offering a portion of its equity to public market investors on a stock exchange, marking a significant milestone for mature companies.
The readiness of a business for a public market is determined by its ability to demonstrate tangible market value and meet the financial standards of the chosen exchange. Preparations often involve strengthening leadership teams and enhancing financial, legal, and operational processes. "A strong team, strong financials, [and] solid processes across the company to ensure repeatability of operating performance and forecasts are crucial pieces of IPO preparation," said Eghosa Omoigui, the managing general partner of EchoVC Partners.
However, startups should not rush into an IPO without careful consideration. The process is time-consuming and can be costly due to various associated expenses including underwriters' fees, listing fees, lawyer fees, auditor fees, and investor relations fees. For instance, companies with smaller capitalization—below $2 billion—where most African tech startups fall in—are expected to pay between $55,000 and $75,000 in listing fees.
The current market climate has also seen founders choosing to stay private longer due to the scrutiny and unforgiving nature of valuations on public markets. For instance, grocery delivery giant Instacart is slated to go public this month at an estimated valuation of $9 billion—a significant discount from its $39 billion valuation on private markets two years ago.
While high valuations were achieved by startups in 2021 due to low-interest rates-fuelled risk-taking, successive years have witnessed businesses being priced more reasonably. This trend has been driven by investors looking to similar but publicly listed companies to guide perspectives on private valuations.
Despite the potential for valuation cuts, a successful IPO can be financially transformative for all parties involved, particularly underwriters who charge fees and take a share of gross proceeds. However, it's not all about high valuations. The performance of the business once it is listed is equally critical. As David Messan of First Founders Inc. points out, it takes deep resilience to stay on the stock exchange amid possible global recession threats.
In conclusion, the decision to go public involves careful consideration of various factors beyond just company size. According to the British Business Bank, a company must have at least 5 million euros in revenue before becoming eligible for an IPO. Ultimately, the decision should align with the company's growth path and objectives.
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