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The Diligent team
GRC trends and insights

What happens when your IPO fails?

November 13, 2019
0 min read
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When the hype over a new business or product doesn't meet its expectations, the excitement over it quickly wanes. Even when an initial public offering (IPO) starts out strong, it can lose money on the first day of going public, or in the next several days thereafter. According to Goldman Sachs, less than a quarter of companies going public in 2019 will have a positive net income, which is the lowest level since the beginning of the Information Age. Ride-sharing companies like Uber and Lyft haven't done well after IPO, but Goldman Sachs points to biotech companies that are lowering the average. Biotech corporations account for 28% of IPOs and they're not forecast to be profitable for the next three years.

The reality is that under the right circumstances, even a solid IPO can fail. However, there are a variety of options to help them survive.

How Does an IPO Fail Despite Being a Popular Stock?

When a company goes public, a group of investment banks underwrite the offering. The lead underwriter takes charge of overseeing how shares of new stock get allocated and who is buying them. When a particular stock is popular, investment banks are quick to sell shares to all interested buyers during the initial public offering. Something that often happens is that once interested buyers have purchased their shares, there's not much interest in the stock once it starts trading.

The best strategy is for investment banks to sell shares strongly while leaving a cadre of investors available who couldn't get shares on the initial public offering.

The role of the underwriter is to gauge the demand in the market, ensure that they're pricing it appropriately, and be on the lookout for investors that might be tempted to dump their shares in short order. It's only fair to recognize that underwriters don't have any control over shares once they've been sold. Some investors are inclined to sell stock while it's hot, do a quick flip and make a fast profit. Large institutions have even less loyalty. If a new stock isn't performing, the company may dump it early so they can keep the rest of their portfolio strong. This may be in their best interests if a stock doesn't look like it will be profitable in the coming years. A decline in market conditions can also cause a stock to drop.

Many underwriters get desperate when shares aren't selling. Poor sales may cause underwriters to sell shares to individual investors or anyone as a last resort. Investors should be cautious about stocks that aren't selling.

What Happens When an IPO Fails?

The hope for companies going public is that everyone makes money. When it's successful, an IPO raises lots of money to keep the business going. The founders also usually get a nice payday as they sell their private shares. What happens when the unthinkable happens ' the company fails to sell enough shares to sustain itself?

This is a time when companies can put all the extensive documentation they've collected to good use. Documents on their business strategy, sales, profits and sales projections can be used to try to interest other types of funders.

Companies that have difficulty attracting new investors may have to tighten up their budgets and hold off on new projects until the IPO can stabilize itself. There are a host of other ways that IPOs can get funding to keep themselves going.

Ways to Raise Revenue for Failing IPOs

Most companies have raised venture capital at some point in the past. It doesn't hurt to ask current investors if they would be interested in participating in an additional round of funding. Alternatively, the company could reopen the last round of venture capital raised and add new funding. One of the investment banks that backed or sponsored an IPO might also take an interest in investing in the company once the IPO is put off.

Owners may be able to take out a private loan, which doesn't require them to give up a stake in the company. The benefit of this is that it gives owners more control over decision making. Similarly, a revolving credit line can be useful if the company doesn't need major funds for expansion. The bank releases additional funds as the company pays them back.

It may also be possible to get a government grant. The benefit to this is that you don't have to pay it back. Since you've done all the paperwork for the IPO, you'd have all the financial information readily available.

Another popular alternative is to sell the company. This will help cash out investors and provide a nice retirement for founders. The purchase price would help to fund growth and allow for a surplus. Sellers may allow founders to stay on and manage the business if they choose or the company may grant them stock.

Finally, a failing IPO could actually buy another company that is a competitor or that is related. The incoming cash might be enough to meet the fundraising needs. To make this work, the company would need to look for investors that specialize in providing money for mergers and acquisitions. Once again, the initial IPO documentation will be a great asset in finding an interested investor.

The perfect place to store all of your documents for the preparation of the IPO is with a board management system by Diligent Corporation. If additional funding is ever needed, boards would have access to information on the market sector, management team, business strategy, profits and sales, sales projections and other information ready to share securely with investors. Board portal software gives boards and executives the right tools, insights and analytics to access board materials, track company performance and gather information in real time around competitive news and regulatory filings.

Diligent Boards allows boards to manage agendas, annotations, documents and discussions of board meetings quickly and securely online. Directors and executives also get real-time updates from their laptops, smartphones and tablets around the clock. It's the modern governance approach to managing an IPO.


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