30 IPO Myths and Realities for Tech Companies

by | Feb 16, 2024

Home 5 Agile Thinking 5 30 IPO Myths and Realities for Tech Companies

The tech startup journey is a panorama of milestones, from the first round of funding to scaling up operations. One milestone that often gets mythicised is the initial public offering (IPO).

This Agile Thinking® Insight will clarify the truth behind 30 common misconceptions surrounding tech company IPOs, be it a listing on NASDAQ, ASX, or another exchange. Tech founders and shareholders should use this insight as a checklist to validate the assumptions they’re contemplating for discussions about going public.

Myth 1: IPO = Instant Riches

The first and perhaps the most pervasive myth is that an IPO will make the founders instantly wealthy. When tech company Atlassian went public on the NASDAQ in 2015, co-founders Scott Farquhar and Mike Cannon-Brookes became billionaires overnight. However, this is far from the norm. Shareholder wealth is contingent on stock performance, and poor market reception can lead to less-than-expected outcomes.

Myth 2: An IPO is the Ultimate Achievement

Many believe that an IPO is the ultimate destination for a tech company. Yet, many successful tech firms, like Canva and Envato, have thrived while remaining privately held. The reality is that an IPO is just one form of exit strategy or funding mechanism, not the end game.

Myth 3: Listing Guarantees Funding

Some companies view IPOs as the only way to raise capital when venture capital or private equity funding becomes unavailable. For instance, Life360 (ASX:360), a San Francisco tech company, chose to list on the ASX when American investors seemed uninterested. However, an IPO doesn’t guarantee capital. It’s dependent on market conditions and investor sentiment.

Myth 4: Greater Exposure Means More Success

Public listing undeniably offers a higher degree of visibility. Companies like Afterpay (ASX:APT) received more attention after listing on the ASX. However, greater exposure also means greater scrutiny from shareholders, the media, and regulators. This can lead to challenges if not managed well. Subsequently, Afterpay was delisted and sold to Block Inc. (NYSE:SQ).

Myth 5: IPOs Provide Easy Liquidity

Liquidity is another reason some tech companies consider going public. But, the lock-up period after the IPO often prevents insiders from selling shares immediately. The stock price might also drop significantly when they can sell, impacting the potential liquidity benefits.

Myth 6: Public Companies Have Greater Credibility

Publicly listed companies are often perceived as more reputable and stable. However, increased credibility comes with the need for rigorous compliance and regulatory obligations. iSignthis, an ASX-listed tech company, learned this the hard way after its shares were suspended from trading due to compliance issues and was delisted in 2022.

Myth 7: The IPO Process is Quick and Easy

Preparing for an IPO is a time-consuming and rigorous process involving extensive due diligence, regulatory filings, investor roadshows, and more. Tech company Fastbrick Robotics (ASX:FBR), for instance, faced several challenges and delays in its ASX listing process.

Myth 8: ASX is a Last Resort for Companies Unable to List in the US

Listing on the ASX is often seen as a backup plan for companies unable to list in the US. This myth is rooted in the fact that the ASX has lower listing requirements than American exchanges like the NASDAQ. However, many companies like 4DS Memory (ASX:4DS) chose to list on the ASX due to its strategic location and investor base, debunking this myth.

Myth 9: All Tech IPOs are Overhyped

While some tech IPOs receive excessive media attention, leading to inflated stock prices and post-IPO crashes (a la Nuix), many others fly under the radar and perform steadily. For every Nuix, there are successful cases like Xero (ASX:XRO), which has consistently grown since its 2007 IPO.

Myth 10: Companies Need to be Profitable to Go Public

Profitability may make a company more attractive to investors, but it’s not a prerequisite for an IPO. The buy-now-pay-later giant Afterpay was not profitable when it went public, but it still attracted significant investor interest.

Myth 11: Once You Go Public, You Stay Public

In fact, companies can delist and return to private ownership, as software company MYOB did in 2019 following the acquisition by KKR, a global private equity firm.

Myth 12: Founders Lose Control After an IPO

While public listing does dilute ownership, strategic structuring can ensure that founders retain operational control. Richard White of WiseTech Global’s (ASX:WTC) maintained significant control of his company following its IPO by holding a majority of the voting rights.

Myth 13: Every IPO has a ‘Pop’

While first-day trading pops, like Zip Co’s (ASX:ZIP) 60% surge, grab headlines, not every IPO experiences such a dramatic rise. Stock performance varies widely based on market conditions and investor sentiment.

Myth 14: A Successful IPO Means Long-Term Success

An IPO is merely a milestone, not a guarantee of long-term success. Take the case of Big Un Ltd (ASX:BIG), an ASX-listed tech firm that initially flourished but subsequently collapsed due to financial irregularities.

Myth 15: A Failed IPO is a Dead End

An unsuccessful IPO doesn’t necessarily spell disaster. If the timing or market conditions are off, companies can withdraw their IPO and reconsider when circumstances improve, just as PropertyGuru did in 2019. It has since listed on NYSE (NYSE:PGRU) in 2022, raising $254m, via a special purpose acquisition company (SPAC).

Myth 16: Pre-IPO Valuations Determine Success

Pre-IPO valuations can be misleading. The real test comes when shares start trading on the open market. Freelancer (ASX:FLN) had a high pre-IPO valuation but struggled with stock performance after going public.

Myth 17: IPOs Always Dilute Stock Value

While IPOs often lead to dilution, strategic planning and structuring can mitigate this. For example, when Appen (ASX:APX) went public, it used a structure that minimised dilution.

Myth 18: Only Large Companies Can Go Public

In truth, the ASX encourages listings from small to medium-sized enterprises (SMEs), offering them a supportive platform to raise capital and expand. For instance, Pro Medicus (ASX:PME), a smaller healthcare informatics company, has flourished post-IPO on the ASX, effectively dispelling this commonly held belief.

Myth 19: An IPO Means a Company is Financially Healthy

A company going public doesn’t necessarily indicate its financial health. The truth is, an IPO is merely a method of raising capital. A case in point is the troubled company Guvera, which attempted to list on the ASX, despite having significant financial difficulties. Their IPO was eventually blocked, underscoring the fact that an attempted IPO is not a guaranteed stamp of financial health.

Myth 20: An IPO’s Success Can Be Judged on the First Day

First-day pops, or even drops, are unreliable indicators of a company’s long-term performance post-IPO. The real measure of success is the company’s sustained performance, business growth, and stock price appreciation over time. For instance, Atlassian’s stock rose modestly on its first day of trading but has since grown dramatically, delivering significant long-term shareholder value.

Myth 21: IPOs Always Underperform in the Long Run

It’s incorrect to assume that IPOs are bound to underperform over time. Each IPO is unique and depends on numerous factors, such as the company’s fundamentals, market conditions, and the sector in which it operates. The tech company Xero (ASX:XRO) is an example of an IPO that has consistently outperformed the market since its listing.

Myth 22: IPOs are Only for Institutional Investors

While institutional investors play a significant role in IPOs, retail investors can also participate. Companies like Micro-X (ASX:MX1) have included retail investors in their initial offerings, ensuring a wider distribution of shares.

Myth 23: The More Underwriters, the Better the IPO

A large underwriting syndicate doesn’t necessarily mean a more successful IPO. It’s more important to choose experienced, competent underwriters who understand the business and the market. When Zip Co (ASX:Z1P) went public, it chose one lead manager, contrary to the myth that a larger syndicate leads to a better outcome.

Myth 24: High IPO Demand Guarantees High Post-IPO

Demand High demand during the IPO process does not guarantee continued demand once the company is listed. Investors who are drawn by the hype may not stick around for the long haul. This was evidenced in the case of tech company GetSwift (ASX:GSW), which saw initial interest wane following listing.

Myth 25: The Success of a Similar Company’s IPO Predicts Your Own

Every company is unique, and so is every IPO. Just because a competitor or a similar company had a successful IPO, it doesn’t mean yours will follow suit. Wisetech’s successful IPO didn’t guarantee success for other logistics software companies considering the same path.

Myth 26: The Larger the IPO, the More Successful

The size of an IPO is not always a measure of success. Smaller IPOs can also perform exceedingly well if the company has solid fundamentals and a sound growth strategy, as evidenced by Brainchip Holdings (ASX:BRN).

Myth 27: If Your IPO is Oversubscribed, You Priced it Too Low

An oversubscribed IPO can indeed indicate strong demand, but it doesn’t necessarily mean that the offering was priced too low. Pricing is a complex process that takes into account various factors such as company fundamentals, market conditions, and investor sentiment.

Myth 28: The Best Time to Go Public is When the Market is Booming

While market conditions play a role in the timing of an IPO, it’s not the only factor to consider. Other elements like the company’s financial health, growth prospects, and industry dynamics should also be considered. For instance, Adore Beauty (ASX:ABY) chose to go public during the COVID-19 pandemic and saw substantial success, despite the uncertain market conditions.

Myth 29: Founders Must Retire Post-IPO

While public companies often bring in new executive leadership to navigate the challenges of being public, founders are not required to step down post-IPO. Numerous successful companies, including Atlassian and WiseTech Global, continue to be led by their founders even after going public.

Myth 30: It’s a Failure If the Stock Price Falls Below the IPO Price

A stock falling below its IPO price isn’t necessarily a sign of failure. Stock prices fluctuate based on various factors, many of which are beyond a company’s control. The focus should be on the long-term performance and fundamentals of the company rather than short-term stock price movements.

Concluding the Insight

In conclusion, it’s critical to dispel these myths to understand the real opportunities and challenges presented by an IPO. The journey to going public is complex, demanding, and unique to every company. By debunking these myths, tech companies can approach the IPO process with a clear-eyed perspective, make informed decisions, and build a roadmap to success that aligns with their specific goals and aspirations.