To list or not to list? That’s seemingly the question of 2021 when it comes to the start-up tech sector.

Some prefer to stay private for longer, thus retaining control of the shareholder register and saving on the significant time and cost often associated with the disclosure and compliance requirements of being a public company.

Still, in recent years we’ve seen a flurry of tech IPOs hit the Australian stock market.

And while listing offers access to additional capital and an opportunity to existing shareholders to take profit, there are several things to consider before embarking on an IPO.

Why bother?

The primary reason for listing a company is to raise additional capital. The source of capital to support listed companies in Australia is much deeper for earlier stage technology companies than it is in the private markets. The attraction for investors investing in listed companies is that they will have liquidity, which allows for instant adjustment of positions (up and down) as opposed to the delays and restrictions that apply to buying and selling private equity positions.

The sizable costs involved with listing, as well as significant distraction for the CEO and broader leadership function, and the significant compliance obligations, could, in some cases, outweigh the benefits. A company needs to carefully balance these issues and be confident of their post listing pathway before committing to an IPO.

Losing control

When a company is public, any material change to the business has to be announced under the continuous disclosure rules. Companies can lose control of the narrative around their business when under greater public scrutiny. Once listed, a company will be exposed to a wider range of forces influencing its share price, including research reports, media coverage, broader market sentiment, investor risk appetite, and competitor performance.

Earlier stage tech companies need to demonstrate strong customer and revenue growth to avoid the risk of their share price being discounted in anticipation of future capital raises. Investors watch for the quarterly 4C reports to assess the company’s performance, cash balances and projected expenses. The share price becomes a momentary consensus of price equilibrium, rather than a fixed price set between capital raising as negotiated by the company with their investors.

Shareholder exodus

A major shareholder looking for an exit strategy can be a big factor in determining whether or not to list. In many cases, listing is a way for shareholders to lighten their stake. The extent to which they can reduce their position is however, governed by the ASX.

The portion that must be held following the listing is know as the escrowed holdings. Which means that whilst early investors can take some profit, the majority to their shareholding may be under restriction for up to two years.

But if there’s no shareholder pressure to list, and provided there’s supportive shareholders and the financial backers prepared to put money in for growth, going public may not offer more of an advantage compared to staying private.

Market sentiment

CEOs should consider market sentiment before entertaining the idea of a listing. In Australia at the moment, public markets are recognising the value of early-stage startups on ASX, and this year in particular looks like it will be a busy year for mid-size businesses to list.

In deciding whether or not a listing is the right path, CEOs should think long term.

The benefits of public markets is access to large amounts of capital and for high growth businesses this is appealing, but the public markets also demand returns, and CEOs should be prepared for the scrutiny and high expectations that come with that source of capital.

Dirk Steller is the Managing Partner of fintech focused Seed Space Venture Capital.[DS1]