The Path to a Successful DTC Exit: IPO
Welcome to part two of our four-part blog series about the main paths to exit for any DTC business.
In part one, we focused on the steps you need to take to prepare for an exit. Now, we dive into the DTC IPO exit path, specifically — how it works, how you’ll be valued, and key things to keep in mind. Part three of this series will examine business sales and acquisitions.
An IPO (initial public offering) is the process by which a private company becomes a public company. In a simplification that will make securities attorneys groan, there are essentially two sets of rules and regulations — one for private companies and one for public companies. Public companies receive far more regulatory and legal scrutiny. They must comply with a high volume of rules and regulations and incur big expenses in staff, systems, attorney fees, and accountants to do so. They must also file business reports in certain ways and at specified times, and they get the opportunity to be sued regularly when someone decides that management's actions caused the stock price to plummet.
With all that in mind, you might be asking yourself: Why would any DTC brand consider going public?
The answer is simple – fast cash. Public securities can be efficiently and quickly traded, and the amount that can be invested in them is huge. This gives DTC founders a chance to turn their paper wealth into beautiful houses and expensive assets. Plus, they receive greater access to capital to continue growing their business.
How a DTC IPO Works
An IPO gives companies the chance to create and sell new shares to investors in order to raise millions or even billions of dollars for the company. Most IPOs involve hiring an underwriter (think Goldman Sachs) who then prepares the company to go public. In addition to handling the nitty gritty details of the legal work and the documentation, the investment bankers also market the company to investors. That’s because one of the key regulations associated with an IPO is that companies can’t market themselves in the run up to the IPO. They have to maintain what’s called a “quiet period.”
How do the bankers market a company? They prepare a roadshow in which the bankers, the company CEO, and the CFO attend a blitz of meetings with investors at places like Wellington, Fidelity, and any number of other massive funds. During these meetings, the management team and bankers present to the investors and try to “build the book” — which is basically collecting interest from potential investors at various prices (for example, “I am good for a half a million shares at $17.”)
This song and dance continues up until the day the DTC company goes public. On that day the investment bankers may be calculating the size of their bonuses, but the company’s founders and employees will still only be wealthy on paper. There is a lock up period of six months which has to expire before founders and employees can sell their shares.
There are other ways to go public. And again, risking the eye rolls of the finance geeks, the simplified explanations are:
- Direct Listing: Unlike an IPO, a company that lists directly to an exchange does not issue new shares as it isn’t looking to raise capital for the business. Instead, it allows current private shareholders to sell shares they’re holding to the public. Spotify is an example of a company that did this. In these situations, the company going public saves a ton of money on legal and underwriting fees.
- Reverse Mergers: When a private company buys a controlling interest in a public shell company (with no meaningful assets) and thus gets the benefit of their public status.
- Special Purpose Acquisition Company (SPAC): Also known as a "blank check company", a SPAC is a shell corporation that lists on a stock exchange with the purpose of buying a private company, thus making the private company public without going through the traditional IPO process.
Despite the hefty fees paid to bankers and the expense of the traditional IPO route, it does come with some benefits. All the roadshow conversations with investors help a company get in front of the key public market investors. If you are a household name like Spotify or Google you may not care about that aspect. But for little known, smaller companies, it can be very advantageous.
How You Are Valued
With a traditional IPO, value is based on pure supply and demand — supply of shares and the demand for them. Additionally, investors will value a company based on "comps" (comparables) provided by bankers. These are companies that are considered comparable to the company going public. The comps will have various multiples (revenue multiples and EBITDA multiples) that will then provide a basis upon which to create a valuation.
📈 Want to know how your company might be valued? We provide our own set of comps for DTC public companies as part of the Bainbridge DTC Benchmarks dataset. We update this data set every week, you can subscribe here to get the latest valuation comps delivered to your inbox.
Things to Keep in Mind When Going Public as a DTC
There are some rules of thumb to keep in mind when going public, which will change depending on market conditions. In bear markets, the standards to support a successful IPO will increase and in bull markets those standards will decrease. The guidelines for going public are thus flexible, but usually revolve around size of revenue (typically more than $100M), successive quarters of growth or profits, and time in business.
🏦 Getting above a certain threshold of market cap and tradeable volume is also an important metric. This is because many funds are restricted from investing in companies that don’t meet certain market size and trading volumes as they can’t build meaningful positions or have the liquidity (ability to get out) should they need to. When you manage hundreds of billions of dollars, you can’t go around making tiny bets and owning so much of a company that you move its price every time you sell.
Of course, as with anything, there are exceptions to these rules, such as when Laird Superfoods went public with metrics well below industry averages.
If you are thinking about going public as a DTC, here are a few things you should do right away to set yourself up for success:
- Familiarize Yourself with Other Companies on the Same Path: Start tracking companies in your space or adjacent spaces that are public or going public. Learn what they were doing when they went public and how your metrics compare to theirs. Check out the Bainbridge DTC Benchmarks and subscribe to our newsletter to get the latest data on our set of publicly traded DTC companies.
- Sit in on Earnings Calls: Listen in on some earnings calls of companies you respect and admire. You will get a sense for how the CEO and CFO talk about the business, the types of questions analysts ask, and how to respond. Public companies all have investor sections of their websites (often investor.company.com) and if you look under the quarterly results, they often contain recordings of previous calls and a way to sign up to listen to upcoming calls.
- Start Building Relationships with Bankers: Don’t worry about finding bankers, they will find you. You don’t need to have dozens of relationship building conversations, but take calls with one or two when they reach out and ask them questions about what you need to do in order to be successful in the DTC IPO process. The bankers may even invite you to one of their conferences, which is a great way to experience what it’s like to answer to public investors and analysts.
Personal Considerations for DTC Founders
Going public is hard. Being public is really hard. You’ll be required to keep a more rigorous level of structure when it comes to reporting, hiring practices, and general business processes. It’s rare for a founder to transition into this mindset and process seamlessly.
Most companies also face indifference from investors. You need to be prepared to pitch and tell your story over and over again to investors who are smart, but often distracted by a lot of other companies who are courting them as well.
At the end of the day, if you are trying to build something massive, win markets and enter new ones, and need access to deep and quick capital, then going public might be right for you. Additionally, your public shares can be a great currency for making future acquisitions so that you can achieve even greater growth.
Thinking that an IPO isn’t the right exit for your DTC business? Part three of this series will more extensively into a sale of your business.