By Gene Massey
For smaller, early-stage companies who are raising capital, everyone knows that investors for these companies like to hear the word “IPO” when they are pitched an investment. Since most investors are not really excited about waiting years for their return, companies will sometimes promise investors an IPO and go public before they should. This is especially true with some smaller company Regulation A or Reg CF offerings when issuers who have completed non-traded offerings with a large group of investors desire a listing on Nasdaq or the OTC to provide liquidity to those early investors. A company doing an IPO that is sold by large investment banks will not usually be using a Regulation A online marketing campaign. Those bankers will be reaching out directly to their investors.
Less experienced advisors, bankers, attorneys and others whose motives may not align with these early-stage companies and who stand to profit from these smaller IPO’s have sometimes misled these issuers, as well as their investors, in order to get the deal done. A promise of an exchange listing from their IPO helps to convince investors that they can expect a quick exit through a sale of their shares. This desire by so many early-round investors to exit at an IPO exchange listing is certainly one of the causes for the stock price declines so prevalent today with new issues.
This can be supported in a recent article by Jason Paltrowitz, Executive Vice President of OTC Markets, “in a study conducted by OTC Markets, which valued 91 IPOS that were listed on NASDAQ CM and NYSE AMEX, a majority of these listings (92%) delivered a negative return from their offering price once they became public.” Paltrowitz blames the small IPO advisor sector: “a small group of conflicted investment banks, lawyers, and advisors looking for financial transactions to monetize are pitching a false narrative, aggressively selling small companies on listing on an exchange when it is too early, not appropriate, or will harm existing shareholders, and using the glamour of an exchange listing to hide the financial engineering and destructive nature of the transactions.”
If 92% of IPO’s decline after an exchange listing, then companies are losing their fundamental value, and it doesn’t take a Wall Street analyst to know that IPO’s could soon lose their luster to companies, brokers, and retail investors, and make it harder for companies to raise capital.
What then can prevent so many investors from wanting to sell their stock when it hits the exchange? What can prevent these stock-price declines and help companies retain their value? What can help a company’s stock not just hold its value, but actually increase in value after the IPO?
Let’s first hear from a few industry insiders.
From Mark Elenowitz, Managing Director of Digital Offering:
“The key to a successful IPO is not only appropriate valuation and avoiding toxic structures, but also effective communication, post listing. The CEOs job becomes two jobs once the IPO occurs: operations of the business to generate shareholder value and communications to the street on that operational development. Its important that issuers understand that they must use the proceeds of the offering to execute the business plan, generate revenue and earnings, but most importantly, to communicate those actions through consistent communication through press releases, investment conferences, and analyst coverage. Without a communication strategy, your public company journey will fall on deaf ears along with your share price.”
From David Weild, Former NASDAQ Vice-Chairman and CEO of Weild & Co.:
“Under $250 million, companies must capture the interest of retail investors with a buy signal or “catalyst” for why the stock should increase in price. Easier said than done. The most successful companies build CRMs to which they constantly add and cultivate investors: 20,000, 40,000 even 100,000. They work the social media networks. They hire retail IR specialists that can do large-scale retail reach out. It requires a budget. Not for the faint of heart!”
From Laura Anthony, veteran securities attorney:
“Upon completing an IPO it is important for management to communicate with the public markets including through responsible financial relations and regular press releases. However, the most significant factor in being successful in the public markets is to perform in the underlying business. A company is not public for a week, month or year but rather for an extended period in its business lifecycle, during which time, markets will fluctuate up and down. Markets may react negatively or positively to short-term results. It is vital to maintain focus on the overall long-term growth and development of the business.”
According to a Barron’sarticle by Brian Swint, “Why Listings are flopping,” another reason for this problem of share price declines is that “advisors don’t have a good understanding of how these companies should be valued. Or, put another way—they’ve misjudged current market conditions. The result is that companies that have recently come to the market for cash, now have an even bigger burden than usual in proving their value.”
Brian is certainly right, that with the selling pressure on companies from investors looking for their exit on an exchange, these companies have a bigger burden than they had initially when they first sold the stock to investors. The investors heard a great story through online marketing, or from the mouth of their broker, that convinced them to buy the stock in the first place. A lot of folks were hustling to get that stock sold and get their commissions. All the marketing companies also busted their buns to pitch those stocks online and the brokers called everyone they knew to push the stock.
Where are they now? With that marketing campaign over and the brokers having gotten their commissions and moved on, those folks are gone AND you have investors looking for their exit by selling their shares. Yikes! It’s a wonder that the shares have any value left at all. Thank God for short covering?
If this sounds bleak, it is, and this is a big reason why many IPO exchange listed stocks are in decline. So what’s a mother to do?
Marketing and IR to the rescue?
Great marketing only works if companies have done as Laura Anthony has suggested and “maintained focus on the overall long-term growth and development of the business,” and as Mark Elenowitz suggests: “issuers must use the proceeds of the offering to execute the business plan, and generate more revenues and earnings.”
Once the company is using its new capital properly and can demonstrate that it is solid and growing its business, the stock will usually reflect the company’s success, if their story is well told and it reaches investors. However, the company must also do as David Weild suggests and“work the social media networks and hire retail IR specialists that can do large-scale retail reach out.”
The extensive and expensive marketing effort undertaken by the company and their advisors for selling the IPO cannot stop at the listing. The marketing must continue with even greater enthusiasm. The communication with the shareholders must even expand, because now we also have selling pressure from those investors ready for their exit. If those investors are ready to cash out, what can convince them to hold on to their shares? And if the stock price is not going up, or even worse, going down, what will bring in new investors to support the stock?
The After IPO Marketing Campaign
Unfortunately, prior to the IPO everyone has been so focused on getting the money, that when they get it, they often take a breather. It was such a tough slog to get the money that they might not have been as focused on marketing the offering after the IPO as they should have. Of course this is not always true, but the 92 % of company stock declines shows that this could very well be correct. Most companies have not planned to come out with an even stronger marketing campaign after the listing.
At MediaShares, we think that whatever online marketing campaign got the company its IPO money must continue, and be even better than before. No taking a breather! After the IPO, broker support may not be what it was, and what is left to save the day is the online marketing campaign, so it better be damn good.
With new cash and the exposure of an exchange listing, a company must now shine. It needs to show the world that it deserved that new funding, and in its “after IPO marketing campaign” they must convince shareholders that they made a wonderful decision to invest in them. They need to keep the same fire burning that got them the capital in the first place, and give them good reasons to stick around for the rest of the show.
This “after IPO campaign” should have been created long before the listing, but should nevertheless look fresh, with exciting new developments. You are going to need to change an investor’s mind from selling her shares! You are also going to need to attract new investors!
The company better have a great story, and they better tell it really well. They should plan the timed releases of all the fabulous news that they have been saving for after the IPO and release each piece of news at just the right time.
The companies should have social media posts, videos, webinars, press releases and email campaigns all massaged and lined up to let those guns blaze at just the right times. They should have top legal advice to oversee and approve in advance every single Tweet, email, video, press release and webinar to make sure they are taking them all to the limit without causing trouble. It would help if the company pre-plans the timing of coming events and releases the press on those events to get maximum exposure from them.
A really good marketing campaign for a company that is effectively implementing its business model can save the day after the IPO. But as David Weild says: “It requires a budget. Not for the faint of heart!”
Gene Massey is the CEO of MediaShares.com, a marketing consultancy that specializes in online Reg CF and Reg A offerings. For many years, Gene was an award-winning TV commercial director and was one of the early pioneers in equity crowdfunding. In 2012 he was a speaker at one of the very first crowdfunding conferences and he is now a regular speaker at Dealflow Events.