‘Going public’ is often seen as a business milestone. Not only does an IPO allow companies to raise capital to fuel future growth, it provides liquidity to angel, VC investors, and early joiners of the company. As publicly-listed companies are required to report their trading activity, getting listed will also encourage companies to improve their corporate governance.
Having achieved substantial scale of business, three Alibaba Entrepreneurs Fund (AEF) portfolio companies have recently announced their decision to take their company public.
Prenetics, a global leader in genomic and diagnostic testing, recently announced its plan to go public on the Nasdaq via a SPAC merger. If successful, Prenetics will become the first Hong Kong unicorn to be publicly listed in any market.
Aside from Prenetics, GOGOX, Asia’s leading technology-driven logistics platform, and DayDayCook, a lifestyle content platform and merchandiser, also confirmed that they would seek a HK IPO and a US IPO in a SPAC deal respectively.
But it’s not just those three. A few of our other portfolio companies also have investment firms knocking on their doors to pitch for a listing.
In view of this, we have invited experts who have helped start-ups launch IPOs to provide valuable insights on the benefits of going public, and the difference between IPOs and SPACs.
First off, why go public?
Before deciding whether to list as an IPO or using a SPAC, start-ups need to ask themselves, do I need to raise public funds to scale my business or to maintain leadership position in the market? Are there other ways I can raise capital? Will going public motivate my employees? If you’re still expanding, it is worth considering if you’re bringing your company to market too early, as that might lead to an undervaluation of your business.
Second, are you ready to go public?
Once you go public, your business would be under the scrutiny of investors, regulators and the public. Your business would also need to abide by certain corporate governance standards.
I come across many passionate founders who deeply believe that their products will make a difference to society.
Going public might pose a challenge to some of that thinking.
For example, you won’t be able to do make any unconventional or spur-of-the-moment decisions. You would also need to mindful of everything you say in public. Any words or actions that might affect company or stock performance will be put under the microscope.
Once you have decided to public, there are several things you could plan ahead for, including rules affecting a company’s governance, disclosure of trading activity and internal controls.
As an IPO usually takes at least 6 to 12 months, it’s likely that the company would have installed key positions, including the CFO, Investor Relations and Legal Counsel, at this stage.
On the other hand, a SPAC merge usually occurs anywhere from a few weeks to months, so the company has a much shorter planning period. However, if a company is already highly regulated, and have gained SFC or HKMA licensing, it should be ready to go public.
If you have answers to the above questions, you may consider the following:
An important question to ask yourself is, where should you get listed?
While it’s vital to select the capital market offering higher valuation and liquidity, you also need to consider if your business is unique to a specific region, as you’re likely to expend extra efforts in explaining your business to investors from another region. If investors don’t understand your business and philosophy, you run the risk of them quickly losing faith in event of a market or regulatory shift. This will ultimately be reflected in your stock price.
Another question you need to ask is, should you list as an IPO or merge with a SPAC?
SPACs are all the rage, but they aren’t a new concept. Having originated during the 1990s in the US, it has enjoyed a resurgence of interest lately. The uncertainties of COVID-19 means regulators are increasingly scrutinizing whether a company can withstand impact. As a result, companies are facing rising costs to launch IPOs.
SPACs offer start-ups a simpler and quicker route to raise funds.
A SPAC is essentially a shell company set up for purpose of raising funds through an IPO.
According to SPAC analytics, there are 421 publicly listed SPACs to update, making up 60% of all IPOs. These 421 SPACs have raised a total of US122.854 million, constituting 40% of total funds raised by IPOs. That marks a huge jump from 2019, when there were only 59 SPACs valued at a total of US13,600 million.
There might be more SPACs in the future. SPACs have just been approved in Singapore. The HKEX is also considering rewriting regulations to allow SPACs to be listed in the city.
One advantage that SPACs has over IPOs is they can often be done within a few weeks.
As a SPAC similar to a merger, the value of a business could be more easily negotiated, allowing it to withstand any shifts in market sentiment.
In comparison, an IPO typically takes a minimum of 6 to 12 months, during which market uncertainties might impact the pricing and demand.
When deciding whether to list as SPAC or IPO, it depends on the scale of business, as well as where the business is based.
And finally: do you need do pre-IPO financing?
This isn’t a must. If you have the luxury of picking your investors, pick someone who is likely to become a longer partner, knows your business inside-out, and has the experience helping other start-ups list publicly.
An ideal investor is a supportive one. They might raise the credibility of your business in eyes of other investors’ by helping to pitch your business. They provide market insights and mentorship without intervening in your day-to-day decisions.
After you have made the decision to go public, you need to stay on top of things. Do not spend all your time and energy on the listing, and neglect the development of your core business. Do not delegate banks or lawyers to write your prospectus or IPO roadshow presentations. Only you know your business best, including what drives its growth and future. And investors want that-they need to hear your passion to believe in your vision.
We look forward to seeing more homegrown companies going to market in the future.