An IPO can provide the necessary capital, especially for young companies in the tech industry. But when is a company ready for the “parquet”?
Technology companies, and especially new technologies, have long enjoyed a great deal of attention from investors. New technologies and trends in interaction with digitization and networking, services and logistics as well as electromobility and more focused environmental aspects shape stock market developments worldwide. Some listed technology companies have even recorded above-average increases in value over a long period of time.
Nevertheless, there are always setbacks, as the recent decline in the area of hydrogen drives shows. The profit expectation, i.e. the view into the future of a company, is already heavily priced in today. While stable and dividend-yielding stocks were popular in the past, there is now much more interest in high-risk investments. Trading is getting faster and faster and therefore more complex. The short-term volatility in the stock market has increased enormously.
What do entrepreneurs need to know?
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If you are considering starting a company and going public, you should think about it a lot beforehand. Going public is very cost-intensive and involves considerable dangers. Especially since “personal” influencing and decision-making features can vary accordingly with the shift to “new” investors. Sometimes shareholder financing within a GmbH is better. But if you actually need the capital market to finance long-term technological developments and research, you should ask yourself the following questions – as a checklist, so to speak – before going public:
How realistic is the young company’s business plan – is the entrepreneurial story true?
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Every company, every idea has to be implemented and of course “realistic and feasible” so that donors can take this “risk”. Because in the end every startup with a high volume of borrowed capital and an IPO is a kind of “bet on an uncertain future” from an investor’s point of view, even if the story is convincing – if the capital contribution and the investment are worthwhile, if successes and profits are generated, the startup can really do it with you Convince the “sustainable” concept and occupy a permanent position in the market and the industry? Scale effects for cost reductions and planned increases in sales should not be disregarded even with any euphoria.
What benefit does the “new” technology offer its users – for example, will an established industry be “reinvented”?
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Economy basically works through two starting points: innovation and imitation. Both models can show solid and profitable success stories in the short, medium and long term. Especially with regard to tech startups, however, the “real” added value of the product or service should be clearly visible for customers and consumers and should be in the foreground when it comes to market capitalization.
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What are the growth prospects – can the business model be scaled internationally?
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What works in a regional market environment does not necessarily mean that the company’s goals are also successful on an international level. Political and legal framework conditions, infrastructure and also different buyer and consumer behavior can differ greatly and deviate from the “familiar” framework conditions.
Is a company already profitable or when can profits be expected?
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As a “young” tech company, there are a multitude of challenges to be mastered; Building a company requires a lot of adjustments in order to achieve a certain degree of stability. Growth and a well-balanced financing are the basis for a successful brand building and market assertion. However, the “higher” requirements and requirements for an IPO are not insignificant for a young company, reporting obligations must be complied with and liquidity values must be correct. The case law has taken this fact into account by applying a “positive continuation forecast of twelve months” and must harmonize with a necessary solvency.
How high are the entry barriers for potential competitors?
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A young tech startup should have a visible unique selling point on the “have side” and know exactly what the market situation and the performance of potential competitors look like. On the one hand, your own position can be secured through very classic patent applications (know-how); on the other hand, there are other factors that should be taken into account. These include legal and resource-dependent factors (capital inflow, copyright protection, availability of skilled workers) or logistical, social (customer loyalty) and ecological restrictions (permits, environmental requirements).
How high is the financing requirement in the coming years?
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A startup with stock market ambitions will quickly find that the cost side is huge in the initial phase and creditors like to understand where the inflow of funds is used. Rents, personnel, logistics and marketing are certainly major cost drivers, and the cost of materials and research and development must also be covered. Startups such as in the food delivery market need a lot of capital for many employees, logistical tasks and large-scale advertising campaigns, while other companies with high-tech ideas such as in the “air taxi scene”, on the other hand, need a lot of money for materials, research and development. “Debt” without consideration can never be a permanent solution for a company and must be limited in time.
It is important that an effective customer approach and acquisition succeeds and that an internal “incentive system” is successfully set up for the decision-makers in the company – in the sense of the authority (investors) making “good” decisions. The example of the Cargolifter impressively shows that the need for financing kept growing, but the idea got smaller and smaller and the implementation was then completely off the table – many people lost a lot of money!
Should growth only be driven organically or also through acquisitions?
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In a “buyer’s market”, the demand decides the supply. This market economy principle applies to every company, regardless of whether it is a classic GmbH or a listed stock corporation. The company’s orientation determines the point in time at which the acquisition becomes more important. If the company is strong enough and attractive in terms of appearance and content (“unique selling proposition”), it can grow healthily without difficult acquisitions. Companies with a highly competitive environment, on the other hand, are more likely to need to expand beyond the market. An IPO is always closely linked to promise and trust – in both directions: on the part of the investor and the customer.
As the example of Rocket Internet shows, a withdrawal from the stock market can also serve the company. Unfortunately, the investor’s rights came under the wheels, because the compensation offered was far below market value. The more recent IPOs, that is, IPOs in Germany, make it clear how ambiguously “new” or supposedly disruptive business models can be accepted by the market. The disappointing results for About You, Mister Spex and Auto1 are just a few examples. A good business model and profitable share price development are two different things.
Robert Peres is a lawyer specializing in investor protection. In 2016 he founded the Minority shareholders initiativethat seeks a dialogue with the legislature and advocates for the rights of investors.
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