How to Do an IPO Properly as a Unicorn Company

Nicholas J Price

All eyes are on the tech startup companies as businesses that have the most potential to be unicorn companies. According to TechCrunch, there were 279 unicorns as of March 2018. You'll easily recognize the names of many of the companies that made the ranks of those on the most recent unicorn list. They include companies like Ant Financial, DIDI, Uber, Airbnb, Stripe, Palantir Technologies, Pinterest and Lyft.

What Is a Unicorn Company?

The term unicorn company was coined by Aileen Lee, a venture capitalist, in 2013. A unicorn company is a startup company that's privately held and valued at over $1 billion. The term refers to how rare it is to take a company through IPO without joining the ranks of the 80% of IPOs that fail.

Other related terms include the decacorn, which refers to companies with over $10 billion in revenue, and the hectocorn, which refers to companies with over $100 billion in revenue.

Example of a Unicorn

The most recent example of a strong unicorn is Zoom, a videoconferencing startup. Zoom expects to go public in the second quarter of 2019.

Zoom reported earnings of $60.8 million in 2017 and grew its revenue to $151.5 million in 2018. At the same time, they lowered their losses from $14 million in 2017 to $7.5 million in 2018. Morgan Stanley will be leading the offering.

How to IPO Properly as a Unicorn Company

Zoom provides a prime example of the steps that unicorn companies need to take to present their IPO with the greatest potential for success.

One of the first things they did well was that they raised strong venture capital. Zoom attracted such investors such as Sequoia Capital, Data Collective - DCVC, Qualcomm Ventures, AME Cloud Ventures and Horizons Ventures, to name a few.

Another important component of a successful IPO is having a top-rated CEO. Eric Yuan is the CEO and founder of Zoom. Yuan is a self-made man who came to the United States from China as a student. Yuan counts persistence as one of his greatest attributes. He states that he applied for a U.S. visa nine times within two years before he was able to get one.

First, successful unicorn IPOs will define an attractive equity story. They'll detail the company's strengths and opportunities, as well as describe how they mitigate risks and threats to the business model. The equity story proves that they have an attractive proposition for investors.

IPOs also need to design an adequate process that enables them to determine the right price of their initial shares. Companies will need to position the IPO with respect to other publicly listed companies that are either in the same sector or that at least share similar characteristics to give investors a frame of reference for analysis.

In preparation for the IPO, companies will need to prepare a presentation that clearly sets out the company's business strategy and offers a broad array of information to support its worth. It's well worth the time and effort to design an education plan for investors and to take their feedback into consideration. Worksite visits can be a part of the plan where company executives can answer questions face-to-face and resolve any doubts or reservations.

It's to adjust the offering size and structure to ensure that the company will be able to reach its goals and follow through on its business plan. Once shares start trading in the marketplace, they'll need to have sufficient liquidity.

Timing is an important factor in making an IPO debut. Prior to making the offering, it's good to check the market trends, potential threats, competing actions, and the company's needs and strategies. This is the only time that the company gets to choose its financial partners, so this is the best time to make decisions on how to allocate the offer's shares and build a long-term, stable shareholder base.

Legal and accounting firms will need to travel with executives to help prepare financial statements and the Prospectus. An experienced syndicate of banks can act as book-runners, and co-leads will have substantial knowledge of the institutional investors' commitment to a successful IPO.

The initial public offering is just the start of the company's new life. Investors will be measuring its ability to meet investor commitments, monitoring execution of the business plan and assessing how they treat minority shareholders. Corporate boards will need to review compliance measures and ensure that the company upholds the market's legal standards. Finally, boards will need to set up communications with investors to promote independent analysis and favor the shares' liquidity.

Value in Virtual Data Rooms for Unicorn IPOs

The marketplace is becoming increasingly digitized and boards would be lax not to consider the benefits of technology in preparing for an IPO. A virtual data room (VDR) by Diligent Corporation is the best place to get a unicorn company primed for IPO.

A virtual data room is a safe space with granular control over users, where they can collect, process and distribute information with accuracy and confidentiality. Companies need the ability to handle high volumes of data consistently and in a timely manner. A virtual data room provides real-time access to regulators and shareholders, which provides a high level of transparency.

Boards can store data safely online using cloud-based technology and allow granular access to internal and external parties based on user permission levels. Boards can easily update documents in the VDR in real time to prevent parties from accessing unclear or incomplete data, which could lead to price drops or prevent a sale from being completed.

One of the greatest values in using a VDR is that it provides a high level of security that the company can easily change if regulations tighten up.

Having access to a VDR is just one of the invaluable enterprise governance management software solutions that Diligent developed. Governance Cloud is a suite of fully integrated software solutions that support good governance including Diligent Boards, Messenger, D&O Evaluations, Minutes and more.

You only have to keep pace with high-profile successes such as the AXA Equitable IPO and high-profile failures like Aramco to know that companies need all the human and technological tools they can find to IPO properly as a unicorn company.

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Nicholas J. Price
Nicholas J. Price is a former Manager at Diligent. He has worked extensively in the governance space, particularly on the key governance technologies that can support leadership with the visibility, data and operating capabilities for more effective decision-making.