The START market as an optimum target for startups?

Czech and Slovak startups are generally financed through equity investments or convertible loans within the standard investment rounds (pre-seed, seed and series A-C). An interesting alternative to raising capital in the later stages of a company’s development could be to go public (IPO). The Prague Stock Exchange’s START market is tailored for smaller and medium-sized enterprises.

For many years, the IPO process, or initial public offering, was only used by large companies and was almost unattainable for startups. The Prague Stock Exchange has been trying to change this for 5 years through its START market. It has been attracting smaller and medium-sized innovative companies with a value from CZK 100 million up that want to raise funds for their growth by issuing new shares.[1] The fact that such solution can be optimal is illustrated by the success stories of companies that once also started in garages, such as eMan, Bezvavlasy, FIXED.zone, and Fillamentum.

The benefits that can be gained by going public are manyfold. In addition to money for further development, companies can expect advantages that traditional forms of financing do not offer. The advantage is primarily optimising the balance sheet by supplying capital and thus increasing debt capacity, freely using the capital (no maturity or restrictions as with a loan), or gaining the prestigious status of a publicly traded company, and the associated publicity and strengthened brand.

Advantage 1: Money comes first

IPOs cannot serve as an alternative for raising capital for startups in the early stages of their development. Undoubtedly, the biggest benefit and the main reason why a company might want to offer shares on the stock exchange at a later stage of its development is the inflow of funds. Unlike standard forms of venture capital funding, where startups face long-term difficulties in negotiating the terms, in the START market they can receive funding without the need for such negotiations. In the later stages of the company’s development, the necessity for compromise plans in investment negotiations that are often disadvantageous for a startup can be eliminated.

Compared to the aforementioned financing options, a public offering of shares for startups can be cheaper in the end despite the higher initial expenditures. Total costs in lower millions of CZK, i.e. mainly the costs of an auditor, financial advisor, authorised analyst or legal advisor, can be many times lower than the revenues. In a standard investment cycle, a startup has to spend a lot of money throughout all investment rounds before it reaches a successful exit. Hence, an IPO can completely replace some of the investment rounds in the later stages of a company’s development, saving costs, time and some grey hair on the founders’ heads. An IPO will be particularly advantageous in the case of larger issues, where the costs incurred will be relatively lower compared to the funds raised. The record holder in the START market in this respect is GEVORKYAN, which raised almost CZK 730 million in a public offering in exchange for a 17.61% share.

Companies may also be motivated to enter the stock exchange by zero fixed debt from a convertible loan in the future, as investor funds flow into the company immediately in exchange for participation in its business. This removes the founders’ stress of finding additional investors in follow-on qualifying rounds to convert the loan instead of repaying it. 

Advantage 2: League of Extraordinary Gentlemen

Entry to the stock exchange is a matter of prestige. As of the date of this article, shares of 14 companies have been traded on the START market. After an IPO transaction, the company will rank among the most attractive (and certainly the most well-known) companies in its field. The very fact that company’s shares are publicly traded opens the door to other opportunities – it can attract new employees (to “hook” them, employee stock option plans (ESOPs) are important), customers, business partners, and also other investors. At the same time, publicly traded companies become much more transparent and trustworthy due to regular reporting to the Czech National Bank and information obligations in relation to the stock exchange. 

Moreover, stories of the companies whose shares are to be subscribed on the stock exchange appear on the front pages of Czech and Slovak newspapers. The Prague Stock Exchange itself is active in supporting public offerings and provides strong media and marketing support for each IPO. In the final stages of a listing, marketing roadshows, i.e. events where potential investors are attracted to the growth stories of individual companies, are held. Hence, startups do not need to worry about lack of media attention.

Advantage 3: Partial exit?

In IPOs, founders and existing shareholders generally retain most of their shares in the company as they almost always want to remain involved in its development. This is, of course, a good signal to investors, who can trust that the company will continue to develop in the right direction.

On the other hand, founders may want to sell part of the business after many years of stress and hard work, which is feasible through an IPO; trading at a stock exchange also gives them the option of selling shares on the market gradually.

It should be noted that shares of a publicly traded company are typically much more liquid than shares of “private” companies and can thus be more easily bought/sold on the stock exchange. In addition, the START market has been trading every weekday without a minimum transaction volume since September this year.

What to keep in mind

An IPO requires planning and preparation, however. If a company wants to enter the stock exchange, it must meet relatively strict requirements set by both EU and national law and the stock exchange rules for the given Prague Stock Exchange market. However, the stock exchange rules for the START market are looser than those that apply to the Prime Market, i.e. the PSE market where the largest companies (ČEZ or large Czech banks) are traded.

A company wishing to list on the stock exchange must meet specific conditions – for example, it must exist in the legal form of a joint-stock company. Thus, if the company is a limited liability company, it will first have to be transformed. If it does not have book-entry shares, it must go through a book-entry process with the Central Securities Depository Prague. In addition, the company must have its registered office in the Czech Republic or Slovakia and submit its audited financial statements for the last two to three years (Czech accounting standards are sufficient; contrary to other markets, IFRS international reporting standards are not required here).

However, the company will not be alone in its journey towards an IPO. It will be assisted at all times by a financial advisor, an authorised analyst and a legal advisor, selected by the company from a list compiled by the Prague Stock Exchange. Their help will be needed in preparing the entry into the START market, especially in valuation of the company, setting the right business parameters for the transaction, preparing an analytical report on the economic aspects of the company or legal due diligence.

The main document for investors is the prospectus, the format and content of which is strictly regulated by EU regulations. It contains detailed information about the company, its products, the market in which it operates, including audited financial data for the last two or three financial years and risk factors. The prospectus is approved by the Czech National Bank and only after its publication can the company’s shares be offered to the public. Since companies that typically seek to enter the START market are SMEs, they often only need to prepare an EU Growth prospectus; while it provides considerable simplification compared to a comprehensive prospectus, it still comprises dozens of pages of text.

In view of the above, entering the stock exchange is clearly time-consuming. The preparation of an IPO, from the first steps to the actual public offering of shares, is a process that takes six to twelve months.

What's next?

It is important to remember that after the IPO, the startup’s shares will continue to be traded on the market and be subject to volatile moods of the market and the company’s financial performance. The entry into the START market is also associated with certain new tasks. This includes regular reporting to the Czech National Bank and the stock exchange. In addition, managing persons must notify the Czech National Bank of their trading with the company’s shares. Both measures are in place to prevent market manipulation. We should also remember various information obligations towards the Prague Stock Exchange.

The issuer must also participate in the START Days, which the Prague Stock Exchange usually organises twice a year, in spring and autumn. During START Days, meetings of companies traded on the START market, their shareholders and potential investors take place. At these events, companies are required to present up-to-date information on their performance.

What we can help with

For startups at a later stage of their development, an IPO on the START market can be an interesting alternative and an opportunity to raise funds. An IPO on the START market does not necessarily mean a mere goal, but also a possible path to the PSE Prime Market. Once a company is traded on the stock exchange, it has easier access to more money on the capital market, and it is also common to make secondary public offerings of additional shares.

HAVEL & PARTNERS is one of the few authorised legal advisors for the START market and has executed the most IPOs in this market. Successful HAVEL & PARTNERS transactions include public offerings of Hardwario (2022), Gevorkyan (2022), FIXED.zone (2021), eMan (2020), and Atom Trace (2018).

Thanks to its specialised team, HAVEL & PARTNERS can comprehensively assist with the entry to the Prague Stock Exchange, dealing with corporate, regulatory and tax issues or negotiating with representatives of the START market and the Central Securities Depository Prague. We are at your disposal and will be happy to guide you towards your target.