The Baader-Meinhof phenomenon, or frequency illusion, is a cognitive bias in which something, once noticed, seems to occur more frequently than before. This perception can relate to various entities, such as a word, a brand, or even a song. In the realm of tech IPOs, this phenomenon manifests as we observe certain tech company listings and subsequently develop misconstrued beliefs. News headlines frequently spotlight tech companies successfully listing on the ASX and NASDAQ, thereby intensifying this frequency bias in readers. While going public by listing on a stock exchange is often a commendable and healthy progression for tech companies, it’s essential that this move is motivated by sound and strategic reasons.This Agile Thinking® Insight will dispel 30 prevalent myths about tech IPOs, serving as a vital reference for founders and shareholders contemplating the journey to public listing.
Belief 1: IPO = Instant Riches
The first and perhaps the most pervasive misconception 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.
Belief 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.
Belief 3: Listing Guarantees Funding
Some companies see 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 appeared uninterested. However, an IPO doesn’t guarantee capital. It’s dependent on market conditions and investor sentiment.
Belief 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. Later, Afterpay was delisted and sold to Block Inc. (NYSE:SQ).
Belief 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.
Belief 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 delisted in 2022.
Belief 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.
Belief 8: ASX is a Last Resort for Companies Unable to List in the US
Listing on ASX is often seen as a backup plan for companies unable to list in the US. This b 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 belief.
Belief 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.
Belief 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. Buy-now-pay-later giant Afterpay was not profitable when it went public, but it still attracted significant investor interest.
Belief 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.
Belief 12: Founders Lose Control After an IPO
While public listing does dilute ownership, strategic structuring can ensure that founders retain operational control. WiseTech Global’s (ASX:WTC) Richard White maintained significant control of his company following its IPO by holding a majority of the voting rights.
Belief 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.
Belief 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.
Belief 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).
Belief 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.
Belief 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.
Belief 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.
Belief 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.
Belief 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. Consider Temple & Webster (ASX:TPW), whose share price plunged on the first day but eventually regained momentum and continued to thrive on the ASX.
Belief 21: IPOs are a Cheaper Way to Raise Capital
While an IPO does provide access to a larger pool of investors, the process is expensive. Costs include underwriter fees, legal and accounting costs, and ongoing compliance, reporting, and investor relations expenses. Logistics software company GetSwift, despite a successful IPO, was later mired in legal troubles, which led to significant unexpected costs. It has since been delisted and liquidated.
Belief 22: An IPO is the Only Exit Strategy for Founders
An IPO is just one among several exit strategies available to founders. Alternatives include mergers and acquisitions (M&A), as seen in the case of Plenti, which was acquired by a larger company instead of pursuing an IPO.
Belief 23: Retail Investors Get Equal Access to an IPO
In reality, institutional investors often get preferential access to an IPO. Retail investors may get fewer shares than they applied for or may even be locked out entirely. The IPO of software company TechnologyOne (ASX:TNE), heavily dominated by institutional investors, left limited room for retail investors.
Belief 24: ASX is Less Rigorous Than Other Exchanges
While the ASX has been welcoming to tech companies, it is not a ‘soft’ option. It has stringent listing rules and regulations to protect investors. For instance, when ASX-listed 1Page failed to comply with listing rules, it faced the full rigour of ASX compliance, which led to its eventual delisting.
Belief 25: A Company’s Share Price Post-IPO Reflects Its True Value
A company’s share price post-IPO is influenced by a variety of factors, including market sentiment, which may not accurately reflect the company’s intrinsic value. The volatility of Facebook’s shares post-IPO serves as an example.
Belief 26: Going Public Allows for Complete Financial Transparency
While it’s true that listed companies must disclose more financial information, complete transparency is often not the case. Nuix (ASX:NXL), a software company, faced criticism post-IPO for perceived opacity in its financial reporting.
Belief 27: Founders Can’t Sell Their Shares After the IPO
While it’s true that there is typically a lock-in period post-IPO during which founders can’t sell their shares, it doesn’t mean they can never sell. After this period expires, founders are free to sell their shares in the open market, as seen with Atlassian’s (NASDAQ:TEAM) co-founders, who sold a portion of their holdings post-IPO.
Belief 28: IPOs Always Benefit Employees
Although IPOs can lead to financial rewards for employees, particularly those with stock options, they can also lead to increased pressure and changes in company culture, which may not always be positive.
Belief 29: Tech Company IPOs are a Bubble Waiting to Burst
While the tech sector has seen many IPOs, it doesn’t necessarily signify a bubble. Many of these companies, like WiseTech Global and Altium (ASX:ALU), have shown consistent growth and strong market performance post-IPO.
Belief 30: ASX-listed Tech Companies Can’t Compete Globally
Listing on the ASX does not limit a company’s ability to compete on the global stage. While listed in Australia, companies like Atlassian and Appen (ASX:APX) have significant international operations and compete with global tech giants.
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Unravelling the web of IPO beliefs allows a clearer understanding of the complex journey of going public. It is essential for tech companies, their founders, and potential investors to critically assess these beliefs before venturing into the world of public markets. For every successful Atlassian, cautionary tales like Big Un Ltd or Guvera remind us of an IPO’s potential pitfalls and challenges. This balanced understanding can enable sound, strategic decisions about going public.
The beliefs surrounding tech company IPOs are abundant, and each debunked belief brings us one step closer to understanding the complex realities of public listing.
Tech companies must consider these factors carefully and seek advice when deciding whether to take this significant step.
© 2023 Cube Capital Pty Ltd. All rights reserved. Permission to republish this article is granted, provided Cube Capital Pty Ltd is acknowledged as the copyright holder.