Scan the pages of the news and you’ll likely see stories of failed IPOs. Despite fast growth, some companies that go public are plagued by poor preparation and questionable business models. But completing an initial public offering (IPO) is a significant decision for your healthcare company and will transform the way you do business. As the largest healthcare-focused investor & public relations firm in the U.S., our team has handled countless healthcare IPOs. As a result, we’ve witnessed wins and successes as well as IPO mistakes companies make in their quest to go public. If you’re running a company that’s growing fast, avoid these big mistakes as you look to go public.
Mistake #1: Not developing a plan for “use of proceeds” raised in the IPO
One detrimental mistake I have seen companies make before seeking IPO is not taking the time to appreciate the importance of a thoughtful, strategic, and comprehensive plan for ‘use of proceeds’ raised in the IPO. Making a compelling case for why you need the money you’re raising and how those investments will help support your strategic growth objectives is one of the most important focus areas for the potential investors you will meet with on the IPO road show so nailing this part of the investment “story” is integral to a successful IPO transaction.
Mistake #2: Overpromising on milestones to get the IPO done
One mistake that we see life science management teams make pre-IPO is that they “over-promise” on upcoming clinical and regulatory milestones to get the IPO done. This often haunts them post-IPO when they miss these milestones within the first 12 months post-IPO.
Mistake #3: Letting board members dictate members of the syndicate
The banks that make up the syndicate are often chosen by the CEO with plenty of input from the CFO, as well as other members of the management team. The management team should be comfortable with the analysts at each firm as well as the banking and equity capital markets (ECM) teams they will be working with. In addition, some board members believe that a bulge bracket firm is a necessity for a successful IPO and try to impose this practice as well, but it is not always true.
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Mistake #4: Trying to go pubic without being ready
Completing an IPO at the wrong time is a detrimental mistake I’ve seen some companies make that can be disastrous for their business. More specifically, some companies try to go public before developing realistic growth projections or having enough revenue or milestones to satisfy their public investors post the pricing of the IPO. Before trying to go public, companies need a track record of consistently delivering growth and/or launching products. In addition, some companies run into IPO delays because they do not have audited financial statements.
Mistake #5: Analysts assumptions and models aren’t sufficiently reviewed
Management teams need to make sure that they sufficiently review analysts’ assumptions and models prior to the IPO to make sure everyone is on the same page. This will help prevent analysts’ forecasts and estimates from being “all over the place” once initiation reports are published.
Mistake #6: Not planning in advance
Companies sometimes don’t start planning early enough in advance. Giving yourself time to run a thoughtful organized process helps enable a positive outcome both for the IPO, and in the public markets after the IPO.
In addition, I’ve seen some companies mention forward numbers before they should. Once estimates are out there, you’ll be held to them, and missing estimates can damage credibility, which is not what you need during an IPO process. Keep forward estimates and guidance in broad terms when you can.
Mistake #7: Not seeing enough investors
Before embarking on the IPO process, companies should take as many opportunities to meet with investors as possible. This will allow the management team to:
- Build relationships with these investors
- Enable these investors to get to know the company and be in a better position to invest during the IPO road show
- Allow the management team to demonstrate the ability to achieve milestones by laying them out in initial meetings and coming back once complete, and
- Get feedback on the story that the management team can use to improve messaging and the presentation
Mistake #8: Failing to make a good first impression
There is a saying that you never get a second chance to make a first impression. For a company looking to go public, there is no greater risk than failing to make a good first impression when you are on your “test the waters” IPO road show. Our recommendation: Begin early and overprepare for everything. Specifically, understand and learn about your target audiences and customize internal communication materials (like your corporate deck) to that audience so that the key investment thesis’ are clear and concise.
In addition, before hitting the road, develop a list of high-probability questions and rehearse them until your responses become second nature. You have limited time to make a positive first impression. Having your story down and being prepared for anything that comes at you will help ensure a successful outcome.
In the midst of busted IPOs that have haunted some companies, taking the time to plan early, assemble the right team, and avoid common missteps can help you set your company up for a success.
With so much at stake as you consider taking your company public, learn more about how you can successfully navigate the complex IPO landscape in our Insider’s Guide to Going Public.