For Technology Startups, Taking a Potentially Faster Path to Going Public Doesn’t Mean Skipping Critical Steps

Gordon Tucker, Managing Director Global Leader, Technology, Media and Telecommunications Industry Practice
Chris Wright, Managing Director Global Leader, Business Performance Improvement Practice

Many technology startups are delaying their initial public offering (IPO) — waiting years, in some cases — and going well beyond the traditional Series A, B and C rounds of funding to support the development of their products and services. A major downside of this approach is that, by the time the company is ready to go public, it may have already seen most of its growth. That leaves less opportunity for public investors to see significant returns and could result in a lackluster IPO and lower market value.

The decision to hold off on going public for many years often comes down to the fact that listing shares is a lengthy and complex process — and especially taxing for emerging companies that want to channel their resources into innovation. High-frequency trading, activist investors and the pressure to achieve short-term results at the expense of longer-term sustainable growth are just some concerns for tech startups eyeing an IPO. Recent turmoil in the IPO market has deepened many startups’ wariness.

A new trading platform, the Long-Term Stock Exchange (LTSE), could provide an interesting alternative for emerging tech companies that aren’t keen to list — yet — on a traditional stock exchange, such as the Nasdaq Stock Market or the New York Stock Exchange (NYSE). The new Silicon Valley stock exchange, which goes live later this year, could be a staging ground for tech startups that have a long-term mindset but also want to go public quickly so they can access much-needed capital.

The LTSE markets itself as a place where “companies are rewarded for choosing to innovate, to invest in their employees, and to seed future growth.” While the LTSE could provide a faster, less cumbersome and less costly path to going public, it won’t make it any easier for a business to be a public company. So, it’s important for tech startups considering whether to list on the LTSE to understand that:

  • They must still meet all of the U.S. Securities and Exchange Commission’s (SEC) requirements. That includes preparing the initial SEC Form S-1 registration statement, responding to all SEC comments, filing SEC Form S-1/As, filing 10-Q and 10-K financial reports, and more.
  • The public company readiness (PCR) process remains essential to success. The PCR process can include assessing and making substantial upgrades to financial reporting processes, IT environments, and governance, risk and compliance capabilities. A thorough approach to PCR not only helps a business prepare successfully to go public, but it also helps the company continue to transform after the IPO. And, if an LTSE-listed company would decide later to list on a major exchange such as the NYSE, it will be well-prepared to do so if it was diligent about PCR previously. (For more PCR considerations for emerging tech firms, see this post.)

Making socially responsible practices a higher priority for fast-growing tech firms

Companies will also want to look closely at the LTSE’s governing practices to decide if they can and want to embrace them. As the LTSE explains on its website, it intends to augment, subject to SEC approval, its listing rules “so that when companies list with the exchange to sell shares to the public, they will adopt a set of governing practices that mirror their long-term horizon.” For example, companies will be expected to develop indicators of progress toward long-term success, link executive pay to long-term performance, disclose investments in long-term-focused research and development, and explain their approaches to community, diversity and the environment, according to Zoran Perkov, head of technical operations at the new exchange.

These types of governing practices align with another growing trend driven by investor expectations: the rise of the socially responsible technology firm. To be a responsible technology firm is to manage the organization in a more balanced way, with an increased focus on good governance and responsibility to the larger community, including socially responsible business and environmental practices. A reputation for being this type of tech company is, increasingly, a competitive advantage. So, listing on the LTSE — if it’s right for the business — could make it necessary for a fast-growing technology company to focus early on establishing and refining other practices that will help support its long-term success.

For more tips and insights on how to prepare for an IPO, see the latest edition of Protiviti’s Guide to Public Company Transformation.

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