
Ask HN: What are some indicators that a company will have an IPO or exit? - DidISayTooMuch
Are there quantifiable numbers that can say whether a start-up or a company is doing well and will have successful IPO or exit in the near future?
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idunno246
For an IPO, expect to see the company redoing the entire finance system -
public companies have very strict reporting requirements that startups don't
implement. Also, if they start withholding more information, there's a lot of
things that you can't announce as a public company(or becoming one). Of
course, that could be the opposite and the numbers are so bad they wont talk
about them. One last thing is auditors could indicate either - due diligence
in an acquisition, or prepping for an IPO.

In terms of raw numbers, there's not as clear a thing - I've been in companies
that were acquired for doing really well, and others that might not have been
able to pay payroll in a month.

~~~
yuhong
I have been thinking about the GitLab IPO for a while now. GitLab is not in
Canada and it might be years before they IPO, but one thing I dislike is the
CSA's position that is more strict than SEC:
[https://www.theglobeandmail.com/report-on-business/social-
me...](https://www.theglobeandmail.com/report-on-business/social-media-cant-
be-first-stop-when-canadian-companies-release-big-news-
regulators/article34247700/)

~~~
sytse
We plan to IPO in 2020
[https://about.gitlab.com/strategy/#sequence](https://about.gitlab.com/strategy/#sequence)

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caseysoftware
I've been with two companies that have IPO'd recently - Twilio and Okta - but
nothing here reflects those organizations.

If a company is heading towards an IPO, they MUST already have a CFO in place,
probably 3-5 years in advance. While there are financial systems required,
there are practices, reports, etc etc that require day after day, month after
month, and quarter after quarter monitoring. It's not something that can just
be "cleaned up" at the last minute.

Profitability is not a hard requirement but certainly helps.

The "magic number" used to be $100MM ARR but that doesn't appear to be the
case anymore. I'd wager this is in part because of the increased private/VC
valuations the last few years.

Strong growth is good. Strong growth among the more profitable product lines
is even better. Margins should be high, potentially increasing as the cost of
delivering the product goes down. If the team can put $X into Sales and
Marketing and get 3-5X revenue out, that's a good sign.

If you can determine LTV, CAC, and churn, those are GREAT indicators but
unless you're senior management, odds are you won't see those.

Regardless, it is NOT something you can bet on because even if it does happen,
it can be _YEARS_ down the line and if you're an insider, there are complex
rules on when you can do or say what.

~~~
nasalgoat
Which is why doing an RTO is an attractive alternative. Although they seem
more popular in Canada for some reason.

A Reverse Take-Over is where a company pays for a shell corp that is listed on
a public exchange and the shell officially "takes over" the company, then
changes it's name to that of the "purchased" company, which is a great
shortcut to a public offering.

But the need for a CFO is the same, the books have to follow the standard
public process.

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tristanj
Number of years since initial VC investment.

After 7-12 years in VCs will want to get their money out to pay out their LPs.
Around this time they will start pressuring management to find a buyer or
prepare for an IPO. Though this pressure depends a lot on the company's
financial situation and how willing the VCs are to wait for an exit.

It's not the best indicator but it still is one.

~~~
Johnie
Don't forget about employees. Much of early employee compensation is in the
form of equity. After 4 years, people expect to monetize and reap some of the
rewards. If there is no exit in sight, the senior employees start making for
the exit.

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tarr11
Companies shopping the business, or going public almost always hire a CFO.

This is probably the top indicator IMHO.

~~~
snarf21
This should be the top answer. Hiring an CFO, especially one with ties to
investment bankers or who has taken other companies through exit.

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ChuckMcM
Yes. When a company is 'operationally cash flow positive' which is to say they
make enough money that not only does their bank account balance increase each
quarter, but also their future spending to refresh their equipment and offices
etc would not cause their cash balance to go below its current point. That
company will have the opportunity to 'exit' (sell themselves to another
company) or IPO.

To quote the former CFO of Blekko, "Every month we have a number of dollars in
the bank, that number is bigger than last month, 'Bueno', its smaller than
last month 'No Bueno.'"

Easy and quantifiable.

Also, if the company is losing money, and each month the bank balance goes
down, divide the rate of loss by the balance, at the zero intercept the
company will 'exit'.

Also easy and quantifiable.

Between those two 'easy' versions, lays the challenge. But for your question
which included the caveat "... in the near future" only the easy ones apply.

~~~
Animats
Blekko exited by selling to IBM. That was a pure technology buy; the public
search engine was killed.

~~~
ChuckMcM
True and true, but I'm not sure what you were trying to say. Blekko never did
discover the secret to competing with the #1 and #2 search engine companies
spending over $5B a year to buy search traffic :-). However IBM found great
value in a technology that could effectively crawl and index billions of
pages, that is, remarkably, still a hard problem even today.

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ridruejo
It is complex, but the rule of thumb is that you get to a point in which you
have consistent and predictable revenue. The "magic" number for software
companies in the US is around 100MM.

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adambmedia
All of the employees suddenly stay.

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ian0
In addition to the hiring of an experienced CFO, mentioned already, in the
run-up to an IPO you may see:

\- A cleanup of administrative processes such as HR. Standardisation of leave,
expenses, release of a overly-detailed employee handbook, change of employment
contracts. Exec HR contingency plans, documented reporting lines. Beyond HR,
compliance may also be given more attention than usual.

\- Removal of minor shareholders, cleaning up equity structure, if it was not
done exceptionally well from the beginning.

\- A PR push with a common focussed narrative on the companies aims & growth.
Following this, announcements of comparatively minor things that support it.
Lots of quotes from key management. However, as you draw closer to d-day there
will be a quiet period where no information will be released as part of the
process.

\- Some key execs removing themselves from day to day ops while its ongoing.
Guarded language during announcements as mentioned previously, especially in
the final stages.

There are presumably more indicators based on the companies performance,
investors and the market in general, but I think it would be guesswork without
being in the loop on their corporate strategy.

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Whitespace
Background info:
[https://news.ycombinator.com/item?id=13688591](https://news.ycombinator.com/item?id=13688591)

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mathattack
Let's assume you're meaning an exit with a high multiple on returns, rather
than an acquihire. In this case there are 2 models:

1) Game changing technology. These are very hard to measure, especially from
the outside. You have to ask yourself, "Is this technology for real?" and
"Could a large company monetize this?" This is what's happening in the
autonomous car market. Let's step aside from this.

2) Companies that are growing well and fast on their own. In this case there
are 3 metrics that matter: Revenue, Revenue Growth (new business minus churn)
and Margins. Revenue is the base for valuation, and Growth and Margins
determines the multiple. A weak rule of thumb that answers your question is
that once a SaaS business hits 50mm in ARR, Growth Plus Margins should equal
50%. (It's ok to lose 10% of revenue in margins if you're growing 50% per
year. If you're only growing 20% per year, you should have 30% profitability.)
If it has this it's trending towards a positive exit.

Three caveats:

1) In case 2, if the company has external venture money, they are more likely
to exit. (The VC funds need to return money to investors) If they are self-
funded, they can stay private much longer.

2) Very few companies pull off the high multiple exit or IPO. It is hard to
maintain growth, and hard to eventually turn a profit when you are growing
fast.

3) There are a small subset of VC firms and specific VC partners with
disproportionately outsized success. In the absence of other information, an
investment by them is a good signal. (But smart money won't help a bad
business)

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lojack
If they begin treating their financials as if they were a public company, then
that's a pretty good indicator. It's pretty much mandatory for an IPO or being
acquired by a public company, and its super helpful for other exits as well.

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basseq
There are signs a startup is doing well (e.g., growth), signs that an exit may
be _necessary_ (e.g., capital requirements beyond another VC round), signs an
exit may be _desired_ , signs a company is _ready_ for an IPO, signs a company
is _preparing_ for an exit, signs that exit will be "successful", etc.

You'd have to chain all those together to answer your question as posed.

Generally, look for $100M+ revs, strong growth, institutional investors, and a
reasonably-new CFO with a track record in sales/IPOs.

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DidISayTooMuch
Thanks for all the answers. From what I infer, the one thing that's consistent
is to look for year on year revenue growth. A company that achieves that will
have a healthy exit. A company that doesn't will be forced to a lackluster IPO
or sold off for the minimum value or will shut shop.

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nodesocket
If you're employed at the company, I'm pretty sure you'd know. However, as an
outsider look for regulatory signs such as hiring of new finance/CFO roles.
Quiet period without new product announcements or features (out of the
ordinary).

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quickthrower2
Don't they normally tell the staff? I've been at two that IPOed and they told
all staff. Good carrot to retain staff: the chance to maybe get a couple of
shares.

I'm in Australia though.

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thinbeige
A lead VC (and there the dealmaster) who was involved in more than one exit
before.

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pfarnsworth
-3 years of audited financial records -SOX compliance

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Animats
Profitability. IPOs for money-losers went out in the first dot-com boom.

The scale of the business has to be reasonably large. Market cap in at least 8
figures.

~~~
skinnymuch
Have you looked at recently IPO'ed companies? Many dont turn a profit.
Salesforce only started turning a profit last year I think.

I'll just name a couple of recently or semi recently IPOed companies of
varying reputations that do not turn a profit. All are way above 8 figure
market caps. Are you sure you didn't mean 9 figures or at least closing in on
9 figures.

\- New Relic

\- Atlassian

\- ServiceNow

\- WorkDay

\- Splunk

\- Box

\- Godaddy

~~~
sencho
Atlassian is an odd example here - they've been profitable for a decade:
[http://www.businessinsider.com/atlassian-files-for-
ipo-2015-...](http://www.businessinsider.com/atlassian-files-for-ipo-2015-11)

~~~
skinnymuch
Yes, I should have specified the more unique situation Atlassian is in. They
say they were always profitable, but we have had around 6 earnings reports
since their IPO. I don't think they have turned a profit once. They also don't
seem like they will in the near future.

Do you think it should still be included with an asterisk or not included? I
think an asterisk with an explanation would've been best.

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orasis
Businesses are pretty simple. It's about consistently growing revenue and
healthy cash flow.

