"90% of Companies Preparing for an IPO Never List": Hiroaki Kato, Veteran of Two IPOs, on the Imbalance That Keeps Companies from Going Public

Kato was born in Oita and grew up in Kokura, Fukuoka. Kato studied accounting at Hitotsubashi University's Faculty of Commerce and belonged to the seminar of Professor Ito, whose research focused on Japan's capital markets. While still a student, Kato passed the certified public accountant exam and then joined an audit firm. There, Kato spent about three years handling IPO audits and audits of venture capital firms, and later also worked on advisory engagements.

The turning point came in 2013. Through an introduction from Takano of Keyplayers, Kato met Sato of Metaps and was struck, thinking, "So there are startup entrepreneurs like this." Believing the company would probably go public, Kato looked for a way to contribute and joined as head of administration. Metaps listed within two years, and Kato went on to serve as an executive officer, gaining experience with post-IPO M&A, acquisitions of overseas companies, and the adoption of IFRS (International Financial Reporting Standards). Looking back, Kato notes that it is rare to work through so many issues at around the age of 30.

Throughout that period, PORT had kept reaching out. Kato first met Vice President Maruyama, then the president, and joined after feeling that "this company is amazing too." PORT also went on to list on the Growth Market. Under two founders, one a student entrepreneur with no corporate work experience and the other a university dropout, Kato served as head of administration and as a director, taking both companies public in the shortest possible time. According to Kato, no one else around had experienced two such IPOs back to back. Kato stresses that this was "by chance," and that it was owed not to their own abilities but to the people around them.

At first, Kato says, the idea was simply to put that experience to use somewhere in IPO-related work. What changed things was the COVID-19 pandemic. Of the roughly 100 IPOs Japan sees each year, about 20 companies withdrew their listings. At the time, Kato thought, "Couldn't I have reduced those 20?" and now laughingly calls this a "grand delusion." Wanting to tackle the challenges facing IPOs in Japan, Kato gradually scaled back their involvement as a director at PORT, explained the situation to the president, and launched the IPO Association.

Asked about the challenges in Japan, Kato first drew a comparison with NASDAQ in the United States. As Kato frames it, the U.S. offers a shorter path to listing, but in exchange the pain is greater in terms of total cash outflow and costs. In Japan, the costs themselves are not that high, but the process is long, taking two to three years or more.

Even setting aside differences between markets, Kato says that when you consider where companies stumble, the problem is that few people can speak to the balance required for an IPO. The people involved have no ill intent, yet the fact that companies did not list remains objectively true. Kato has no intention of blaming anyone, but sees the larger issue as one of balance: who, in the end, was able to make the IPO succeed.

Since the association's founding, Kato has championed an "IPO Score." As background, Kato points out that many companies have approached the Growth Market, which presupposes high growth potential, with the attitude that they can list first and think about it afterward. Even if they do manage to list, Kato says, companies with a market capitalization of 100 billion yen or less...

Correction for accuracy: Kato says that even if they do manage to list, companies with a market capitalization of 10 billion yen or less currently account for about half of all listed companies in Japan.

Kato grounds the discussion in numbers. Around 2022, when so-called "audit refugees" became a topic of discussion, Financial Services Agency statistics showed 1,053 companies with audit contracts under the Financial Instruments and Exchange Act. There are about 1,000 companies preparing for an IPO, yet only around 100 actually list each year. In other words, Kato reads the statistics as showing that 90% of companies that enter IPO preparation do not list.

Those involved naturally proceed thinking, "My company is different; I'm in the remaining 10%." But Kato worries that unless someone puts into words why these 90% fail to list, companies will charge ahead without a shared understanding that, at these odds, they will not make it. From investors' standpoint, they want the company to list no matter what, and there is also a dynamic that demands the formal appearance of having an audit firm on board to raise the likelihood of a listing. No one is at fault, Kato says, but striking the balance is getting harder every year.

Here Kato used the analogy of climbing Mount Everest: Why don't we stop starting the climb first and thinking later? Ninety percent get lost on the mountain. The idea is to pack food first, build a team of people to support you, and train your stamina before you climb. Kato said that what can be improved going forward is recognizing, as a shared challenge, the difficulty that even people with IPO experience cannot list unless they can make that success reproducible.

Asked whether there are too many or too few companies in preparation, Kato declined to make a judgment. According to SPEEDA data, around 4,000 startups raise funding each year, and even with a slight decline the number is about 3,700. Around 2014, when Kato entered the industry, the figure was only about 1,400 to 1,500. Kato estimates that, cumulatively and including duplicates, this comes to around 120,000 companies, and compared with that, not many companies advance as far as the audit-firm phase. Kato is therefore neutral on the number itself, and added that perhaps they focus too much on the side of "90% of companies in preparation don't list."

How far, then, could the number of listings be increased? Kato believes that with an approach based on their own experience, 200 companies a year is not impossible. Kato added that 300 might be difficult.

Asked whether the reason companies fail to list lies not in their business growth but in their preparation and organizational setup, Kato answered with a soccer team analogy. If all 11 players are forwards, you can score but you can't defend. If all are defenders, you won't concede, but you won't score either, so you can't win. And if the forwards and defenders are fighting among themselves, each saying "It's your fault," you can't win either. Companies that stumble in an IPO often fall into one of these categories: they focus too heavily on offense and have weak management controls, their management side is too strong and their offense is weak, or there is internal conflict. Kato comes from the administrative side but is in a position to see both the forwards and the defenders, and said there are many cases where Kato thinks a company could have listed if its balance had been a little better.

The figure of 200 also rests on an assumption about market selection. Kato takes a neutral position toward every market, whether TSE Growth, regional emerging markets, or the Pro Market. If you push too hard on the idea that higher-tier markets are better, an atmosphere develops in which companies feel they must raise funds, which also entangles the issue of the founders' ownership stake. There are cases, Kato says, where a company forced its way onto a market it was not really suited for, its management went awry as a result, and it came to regret having been jerked around by the IPO. If you think about markets neutrally, Kato says, 200 is a perfectly reasonable figure.

At the same time, with a 10 billion yen market capitalization requirement emerging as a listing maintenance criterion for TSE Growth, Kato sees the respective appeal of the Standard and Growth markets being reassessed, and expects an interesting era ahead. However, taking into account securities firms' fees and the revenue structure, meaning whether IPOs can work as a business, Kato said that around 200 is the limit for now, and that this ceiling could rise or fall depending on the revenue structures of securities firms and audit firms.

On choosing a market, Kato laid out the following framework. The Growth Market requires "high growth potential," and under the old standards, the benchmark was profits continuing to grow by 30% at a time. The image is not of growth this year or next, but of growth that keeps going. Companies suited to Growth are those that bring in outside investors, accept dilution in order to obtain cash and reinvest it, and are expected to eventually command large corporate value even if they are currently in the red.

On the other hand, Kato thinks the Standard Market is a better fit for owner-run companies and companies that have grown steadily without bringing in outside capital. When hearing about startups, Kato generally assumes Growth, but on hearing that a non-startup company is preparing to list, Kato considers which market would suit it.

As a common challenge beyond team composition, the first thing Kato cited was valuation, that is, the difficulty of pricing at the time of listing.

Kato compares an IPO to matchmaking for marriage. Men and women think differently about their ideal partner, and a book on "how to be popular with women" reads as a different story from a woman's point of view. Likewise, an IPO is a match between investors and entrepreneurs, but most of the stories in circulation are from the entrepreneur's perspective: "how we managed to list." In public markets, Kato says, you should be thinking about how to keep investors from crying after the listing, just as you would want to keep your partner from crying after the wedding, and it is necessary to consider on which side the incentives lie.

Kato pointed to the Lehman shock, when IPOs fell to around 20 a year. When stock prices fall globally, no matter how hard an entrepreneur works, and even if their own business alone is doing well, its valuation gets dragged down by the market as a whole. If PE ratios halve across the board, your own value halves too. In other words, there are times when companies cannot list because of dynamics separate from the entrepreneur's efforts.

There are investors who accept high risk and high return, and others who seek middle risk and middle return or low risk and low return, and when all of those expectations are tested at once at the time of an IPO, opinions tend to diverge. Kato said that one of the difficult themes of an IPO is how to meet shareholders' expectations, how much to insist on one's own valuation, and how to reconcile the opinions of other stakeholders. Asked whether, given the valuations from previous funding rounds, problems akin to a down round can also occur at listing, Kato answered, "Of course."

On weaknesses on the defensive side, Kato, from an accounting perspective, cited the difficulty of detecting revenue fraud. After noting that there had been such a case recently, Kato explained that in a simple business, such as a matching app where Google or Apple takes a 30% fee and revenue and profit are thereby finalized, there is little room for fraud, but in other businesses it is difficult for the person in charge of management, the defender, to keep track of what the forwards are doing. The relationship of trust with the executives and the complexity of the business also play a role.

Another factor Kato keeps in mind is the impact of the law. Businesses that were previously impossible due to legal hurdles are becoming possible through new technology, and businesses that are hard to see from the outside are also emerging. When there is a phase in which a business could change significantly due to legal amendments, a delicate judgment is needed: if you can foresee when those changes will come, it is easier to aim for a listing, and if you cannot, it is better not to raise fixed costs too much, Kato said.

As a point that executives and heads of administrative divisions tend to overlook, Kato cited the role of the CFO. Kato says they try not to use the word "CFO" much. Because it is vague, the image of a "super CFO" swells, and in many cases you have to wonder whether anyone could actually do all that. Kato therefore recommends breaking the expectations down into three.

The first is the CFO that investors such as venture capital firms expect. CFOs often become directors, and since directors exist to raise corporate value for shareholders rather than for employees, they are expected to raise the valuation. The second is the CFO that securities firms expect: someone who can act as a check on the representative director from a governance standpoint. As a director, they hold a vote, and if the other directors' votes come together, they can even remove the representative director. This is a CFO in the sense of someone who fulfills that check function, can engage in dialogue with the capital markets, and understands governance, which is precisely why the securities firm can recommend the company for listing. The third is the CFO that audit firms expect: someone who can take responsibility for the contents of the annual securities report. If there is revenue fraud or similar wrongdoing, the executives and the CFO bear responsibility. It is the audit firm that signs off, but it is a problem if those preparing the report do not understand its contents, and "I don't know; the accounting manager handles that" will not fly.

In Kato's assessment, people from investment banking excel at the role of raising corporate value, governance is quite difficult, and in many cases the CFO comes from an accounting background. The accounting that audit firms expect is naturally understood by accountants. Kato asks how many people in Japan can handle all three of these directions. The CFOs who carry these expectations also feel the pressure: if they come from banking, the company ends up saying "we want an excellent head of administration," and if they come from an administrative background, even if their accounting and management are flawless, they are told they fall short on corporate value. Kato sees this mismatch in expectations as a precarious issue in IPOs.

As a specific listing episode, Kato first looked back on Metaps. At the time, Gunosy and Metaps were about the only companies that had raised more than 1 billion yen through preferred shares. There were few precedents for class shares such as Class A preferred shares, and while there were examples like Cyberdyne, no one knew how to write the disclosure documents, and even when the review raised points, the situation was that "there are no precedents to begin with." Kato describes this as a "first penguin feeling."

The lead investor was the venture capital arm of Fidelity (now Eight Roads), which could be considered a foreign firm. Investors also raised questions, such as whether fees and mechanisms differed from IPOs in the United States, and the company had to explain. For Kato, communicating with existing investors in the context of an IPO was a new undertaking. Yamazaki, the CFO at the time and now president of Metaps, put together a scheme that paired fundraising with stock acquisition rights to align the expectations of each stakeholder, and Kato was responsible for figuring out how to deliver it in practice. Kato recalls that continually taking on new challenges is what makes startups interesting, and that it piqued their curiosity.

Kato's reason for joining was interest in Sato as an entrepreneur. Kato believes that as long as an entrepreneur who founded a company and remains involved in its management stays committed, its corporate value will keep rising. Sato was not the type to go independent after being a salaried employee, but a born entrepreneur who had been doing business since university, and the host also mentioned the story of Sato having made their own way in life since the age of 15. Kato recalls Sato asking, "Are there moments when you refuse to accept something just because the world considers it common sense?" and the two of them discussing it. Why do you have to wear a necktie? Why wear a uniform? Why aren't you allowed to grow a beard? Kato was drawn to this way of thinking, of breaking free from mental frameworks, the idea that you can be freer if you strip away the customs of a particular era or country, and thought that doing something with this person would be interesting.

Kato is now supporting Sato's new business through the IPO Association. Sato had begun space-related research and development out of their own pocket back in the Metaps days, and Kato was aware of it. After about five years of working behind the scenes, the company raised funding, began hiring in earnest in 2024, and got moving. Since both have been through an IPO before, they can skip over what they already understand and get to the point quickly. On the other hand, members without IPO experience sometimes say, "Please explain more about why this happens in an IPO," making it a challenging environment, Kato says.

Asked whether the sheer scale affects the difficulty, Kato pointed to the company raising 1.5 billion yen right at the seed stage. You may hear of that kind of valuation at the seed stage, but you don't usually hear of the amount raised exceeding 1 billion yen, so Kato felt this, too, was something new. However, there are not that many existing shareholders, about the same as at a typical startup, so Kato does not feel this raises the hurdle for an IPO.

The difficulty, Kato believes, lies rather in the business domain. Space and defense are a "grown-up world" unlike typical startups, and it is hard to explain the likelihood that the business will actually succeed. It is a harder domain than starting from scratch, but Kato said they are greatly helped by Sato's track record of having taken a company public once before.

As for PORT, after meeting Vice President Maruyama, Kato spent about a year discussing the company before finally deciding to join. At first Kato was drawn to how impressive Maruyama was, and over the course of their conversations came to see how impressive the president was. By coincidence, Fidelity (Eight Roads) had also invested in PORT, and among that firm's investments, Metaps had been the first and PORT the second, a fortunate connection. When Kato asked the person in charge at that major VC, "Why did you invest in this company?" the answer was that the president stands out for their commitment to following through on what they have committed to and said they would do. Seen from that angle, the president's abilities stood out clearly, Kato says.

However, around the time Kato joined, people around them said things like, "PORT probably won't list," and "Kato, that company won't go public. Didn't you make the wrong call?" Metaps had many interesting members at the time; around 2013 was an era when startups were full of unusual people, and it was still rare for accountants to change jobs. Amid that, Metaps was easy to understand, but PORT started out with mixed opinions. Even so, Kato believed the president was right, kept working, and the company went public.

For Kato, the first IPO, at Metaps, brought great emotion and a sense of accomplishment. The second left Kato "worn to tatters" physically and mentally, and Kato felt it was not something one could do many times. What made Kato happiest about the second was when someone who had doubted the listing said, "It turned out just as you said, Kato. I was surprised." Amid claims that anyone can do an IPO, while in reality many companies fail to list, Kato looks back glad to have believed in a company that others doubted could truly go public.

Asked whether the association's role is to bridge the gap between these two experiences, Kato replied that there was something they realized in hindsight. An IPO often happens only once in a lifetime, and since only around 100 companies list each year, only about 100 executives and managers with IPO experience are produced each year. It is not something people repeat by changing jobs over and over, and Kato thinks it is better that it isn't.

With just one success, you cannot tell whether it can be reproduced. But with two experiences, a common rule emerges from the two coordinates. Using "y = ax + b" as an example, Kato explained that with two points, you can see the variables and the common rule. Putting into words this rule, which Kato happened to notice by going through it twice, is one of the association's missions.

The association's support focuses on solving the problems of the roughly 900 companies, out of about 1,000 preparing for an IPO, that do not make it to a listing. The first thing it tackled was market selection.

Next, the area where Kato thought a different approach could reduce that 900 was people. As a listing approaches, companies start hiring accounting staff, internal auditors, legal staff, and so on, and begin building a structure to strengthen governance. But a hiring mistake can blow up a listing. The association does not do recruitment placement; instead it serves as a judge of hires. For example, if there are 10 candidates, it might advise that about five of them with a particular skill set are likely to be a good fit, or, if the head of administration is strong in accounting, it might put into words that a management manager from outside accounting would make a better pairing.

However, hiring support tends to lean toward the defensive side. So the association then moved into board design, covering what is expected of directors and department heads, including the director in charge of sales and the head of engineering, and what themes to set on the road to listing. According to Kato, in the United States the CEO is in most cases the only CxO on the board, and the board is fairly separate from business execution. In Japan, by contrast, besides the representative director and president, there are also roles such as director and CFO or director and head of administration. The association provides support with this division of roles and with hiring that requires a board resolution. Kato explained that what sets the association's services apart is the aim of playing a role like a "manager" in an IPO, overseeing the formation of both the forwards and the defense.

Finally, Kato spoke about their book, The First Book to Read on How to Start and Manage a Company Aiming for an IPO. It is based on lectures for people about to found a company, and for those whose companies were founded many years ago, it serves as something of a review. Kato says the content is half governance and half finance and accounting.

On the message behind it, Kato touched on Japan's demographics. As the population declines, younger generations will certainly become a minority in terms of political voting power. An IPO, on the other hand, belongs to the world of money, where voting rights are neutral: whether elderly or a child, anyone can hold a vote through money. In that sense, Kato considers the IPO a highly public mechanism. Kato concluded by saying that nothing would make them happier than seeing more people, including those with neither money nor backing, take on new challenges and use this mechanism to solve social problems through IPOs, and that this is what they wrote in the book's afterword.