Investors love finding, and profiting from, the next big thing. We can't help it. It's kind of our thing.
Today, fast-growing companies are increasingly staying private for longer, thanks to the hoards of private capital provided by the venture capital community. This emerging trend can make it hard for investors to predict exactly when a company plans to actually hold an initial public offering, or IPO for short. However, here are three signs that can indicate a company indeed plans to go public.
Leadership team grows up
Successful start-ups are often founded by an individual or a small group. However, by the time a company has grown to the point where it's considering a public listing of its shares, its needs will have evolved meaningfully from its early days. For fast-growing start-ups, this transition can happen in only the course of a few years in some cases, so it's not uncommon for companies to be filling their ranks with veteran talent as they head toward their IPO dates. Even more importantly, the presence of veteran leadership in key managerial roles can prove useful in boosting investor confidence in the management team's ability to continue to execute a firm's growth plans under the added rigor of SEC reporting requirements. Twitter (TWTR), which officially began working toward its IPO in September of 2013, serves as one such example.
We've confidentially submitted an S-1 to the SEC for a planned IPO. This Tweet does not constitute an offer of any securities for sale.-- Twitter (@twitter) September 12, 2013
In the months preceding Twitter's official launch of its IPO campaign, the company also maneuvered to shore up its executive ranks. Only eleven months prior to its filing, Twitter hired Mike Gupta away from Zynga. Twitter then subsequently elevated Gupta to CFO, while shifting tech company veteran Ali Rowghani from CFO and COO roles.
IPO-related job postings
Similar to the above leadership-related signal, private companies eying the public markets often also look to bolster their ranks with lower-level employees with the knowledge to help orchestrate a successful IPO. These roles often operate within a company's legal or finance department, and members of the media and analyst communities routinely scour the job boards of promising private firms to expose possible IPO candidates, a tactic interested individual investors can certainly mimic.
In one recent example, leading music app Spotify recently garnered plenty of press attention when it posted an opening for an "external reporting specialist." However, that same day, Spotify edited the job post to remove any mention of the SEC. Not many companies go to such lengths to obfuscate their intentions, but the move predictably backfired on Spotify's part, further convincing the media that the Swedish music power indeed has its vision firmly trained on a looming public debut.
Filing a Form S-1
What is the one thing all companies must do in order to go public? They have to file the required legal documents. This one should come as no surprise to veteran investors, but for those with less experience, all companies that wish to trade on U.S. stock exchanges are legally required to file a Form S-1 with the Securities and Exchange Commission, or SEC. In case you were wondering, this is the least subtle of the three areas to watch...
Importantly, though, filing a Form S-1 alone isn't nearly enough to bring a private company public. Rather, submitting a Form S-1 merely kickstarts the official process that typically lasts several months before the IPO date actually arrives. The steps in between often include the well-worn milestones like retaining investment bankers and traveling the world to promote the company during the IPO roadshow. However, these steps always occur after a company has submitted its Form S-1 and has already initiated the official public listing process, which is why we opted to direct the discussion to the less-often mentioned machinations above. Once a Form S-1 crosses the SEC's desk, the bankers, road show, and the rest of the pre-IPO frenzy naturally follow.
Putting it all together
As we saw with the Spotify example above, companies typically prefer to mask their IPO intentions to the greatest extent possible. The future can change quickly for a company seeking a public listing, and exogenous factors can derail even the best laid plans. As such, investors interested in following or even potentially owning an IPO candidate should always pay attention to the above signals in order to gain a sharper sense of whether a company is indeed planning an eventual public listing.