By Capital Readiness Department | January 27, 2019
- Growth Potential
Growth directly translates to survival in the world of business. In other words, a business is either growing or dying, especially in an age of mass disruption across industries. For instance, growth in the business’ customer base should translate to higher revenues. This is one of the primary factors in creating the case for investment. How has the business’ revenue growth been for the past 3 to 5 years? Has the customer base being loyal? Has the business made any new investments or gone into a new market segment? What about increased market share? Is the business model one that is scalable? All of these questions pivot around the growth discussion and provide the foundation for establishing the company’s future which makes an attractive IPO.
- Sales and Marketing
The company should have a marketing plan that is appropriate for its products and services because a mismatch will hurt the company financially both from the revenue and cost side. Further, a modern enterprise should have an adequately equipped sales team and a marketing strategy that speaks for the business and gives it a personality that customers can interact with, which will create a community. The business should speak in the appropriate tone to its audience. Has the company moved from being merely a product pushing business to a community? Is there ‘goodwill’ attached to the brand? Does the business have a personality which connects to an audience in a meaningful way? These factors should be achieved through marketing effects which will grow sales significantly in a consistent manner. No sales, no revenue, no business.
A company’s leadership is what makes or breaks an enterprise. This is regardless of industry, size, business model or market focus. Leadership frames the strategy, hires the staff, outs the fires and keeps the company going during good times and bad. Good leadership has competence, creativity, efficiency, flexibility and an attitude that allows the people in the company to be at their best. Poor leadership is slow, incompetent, complacent, arrogant and oblivious to market dynamics. Good companies become great because of leadership. Great companies fail because of leadership. Investors need to see a qualified and experienced leadership team with passion, drive, creativity and synergy with other partners in their industry. Better leadership makes better decisions, better decisions make better companies.
Profits are another central part of creating the case for investment and is a dynamic subject requiring careful study. What is are the profit margins? Do profits vary significantly year over year or do they steadily rise? What is the most profitable product from the company’s offerings? If a company only has one “star product” that generates profits and it is not a new business then that is something to be cautious of, because if that star goes dead then so does your investment. An example of this is oil being Venezuela’s only real offering to the global market. Profitability is the anchor for the investment case and should be at the forefront of the argument for raising capital. A savvy investor will rather invest to increase your profits rather than make you profitable.
- Policies and Procedures
Policies and procedures reflect capable management and that company operations are tight so that the business can focus on making money instead of outing fires. Implementing controls and policies protect a company from exploding and can be thought of like a parachute for the business. Policies and procedures are what separates a professional operation from what is called a ‘patty shop’. Leadership can understand the business thoroughly and while protecting its viability from the disasters of human error. A higher level of accountability from team members can also be achieved which leads to less corruption and smoke, all key factors in trying to raise capital. Are all the necessary licenses obtained? Do we have ethics and guidelines? Are we regulated and disciplined? These questions need to be satisfied as publicly traded companies come under heavy scrutiny and standards need to remain high in order to gain trust.
- Economic Cycle
What stage of the economic cycle are you currently in? The modern market economy goes through a natural ‘boom and bust’ cycle which significantly impacts the activity level of the capital markets. A ‘boom’ reflects economic growth which makes capital markets fertile. On the other hand, a ‘bust’ reflects an economic downturn, typically known also as a recession, creates a more barren capital market. In a boom, markets are optimistic, business confidence is high and the supply of capital is high which creates an easier situation for doing capital raising via an IPO. The opposite is true for a recession but it doesn’t mean that an IPO can’t occur in a recession. It simply means that a different level of caution has to be taken and a different strategy to be employed to raise funds successfully in that environment.