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How Morgan Stanley Checks Whether You’re Ready to Go IPO

“…today companies are a little larger, they tend to be if not profitable, then at least have a proven TAM and proven monetization capability. It is harder nowadays to say, “Don’t worry, we are going to monetize in the future””

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Crawford Jamieson is managing director and co-head for Asia Pacific global capital markets for Morgan Stanley. The veteran IPO maestro tells us what kind of ‘values’ a company needs to have to be ready for an IPO.

To begin with here are several components of value – fundamental value, perceived value in terms of the future business model, scarcity value and present day value.

Today’s value is of the cash flow I can see. When analysts and investors look at companies they consider discounted cash flows. That’s the traditional approach to assessing internet companies. To measuring future value of a company, we have to figure out how much money this company is going to generate in ten years and beyond. It’s a very valuable metric for investors to measure companies by. For instance we can get into epic arguments about what kind of market share Alibaba may have in 7 years. They allow you to think about long term growth, margins and market share.

Then this scarcity value is the psychological value of a company, a company that makes you feel, “I really have to be a part of this company”. When the idea was first presented, companies in social networking, mobile internet and autonomous cars had that effect. It made an investor think, “I just need that, that’s just the sexiest thing I have ever heard. And that’s just another layer of value that will account for valuing your company. Scarcity value may at times carry more weight in assessment your company receives; way beyond that of discounted cash flow, and near term (present day) cash flow.

Market conditions will also play a pivotal role in whether or not your company is approved for IPO. In general there are three types of markets and how much of each value component your company has will vary in each of these markets.

When you’re in a bubble, people will pay any price – they’ll pay it today, tomorrow, and they’ll even pay for the dream.

If you’re in a normal market environment, people will pay for what they see but will be more inclined to buy if there is a discounted cash flow. One thing I frequently look at when analysing a company, is where does stocks trade relative to the analyst discounted cash flows.

In bad markets internet stocks will trade at a 25 percent discount to the cash flow models. And in great markets there will be a 5 percent discount. So markets change and people are giving you more or less credit for the future. And obviously in low multiple environments, you can’t get credit for anything, so you should wait for the market to change.

In today’s environment, with scarcity of product, the companies are getting bigger and waiting a little bit longer. The majority of IPOs right now globally, have proven revenue product and adoption. When I took public in 1999, all we had was page views and 300,000 dollars of revenues, it was an absolute dream scenario.

But today companies are a little larger, they tend to be if not profitable, then at least have a proven TAM and proven monetization capability. It is harder nowadays to say, “Don’t worry, we are going to monetize in the future”. At least this is true for the US investors I often work with.

Also when you’re planning to take your company IPO remember that the reality is most of the time we don’t live in a bubble. So we have to be realistic. Two thirds of the time we will be in a normal market environment. So progression towards an IPO can be built by thinking about how much credit you can get in that environment based on the elements of your business model.

There’s only one environment where a company can go IPO with no proven market or revenue. If you’re lucky you may have some great market conditions and all of a sudden what actually should be private funding can be done in the public market. It’s risk gone. There are deals that get done in this environment, that otherwise aren’t going to get done.

Looking back however I have to say that the companies that have done best in the markets have actually been the ones with more proven revenue and TAM when they go to market. So it doesn’t mean in theory that you couldn’t catch the IPO launch window even if you’re a much earlier stage company. But if we are looking at a multiyear period, because of the challenges of being a public company where you have to meet quarterly disclosure and guidance, companies that have done best actually have been further along.

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morgan stanley Crawford Jamieson

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