What is an IPO: Why Companies Go Public

There are as many glorified tales of triumphant IPOs as there are devastating ones about companies whose entry into the public markets proved their ultimate undoing. Not surprisingly, the logistics behind issuing an Initial Public Offering are supremely complicated — in both making the decision to go there and in actually getting there.

An IPO can be a great strategy for a business to grow, but it’s not for everyone. Indeed, the fact that fewer than 1,000 businesses a year are successful at IPOs (says the Small Business Administration) is reason enough to give the consideration pause. Here’s some counsel to help understand the nature of the beast.

What is an IPO?

An IPO is the first offer of a company’s stock on the public market. “Going public” thus is the sought-after destination of many emerging companies. Here, organizations are compelled to assemble various detailed public disclosures — with the assistance of a lawyer — that they present to an investment bank who handles the underwriting. This procedure involves setting a price for the stock, and arranging participation of large institutional investors.

After that, company execs and the underwriter participate in a road show, wherein they meet with potentially interested parties and look to drum up public interest in the their firm. Traditionally, the IPO has been used as a financing vehicle. Today, it’s a little more complex than that. After all, going public is an expensive proposition. An IPO can cost hundreds of thousands of dollars — and there’s no guarantee it’ll even become a reality.

Why Companies Go Public

When you’re a fuzzy and bootstrapping startup, you’re the darling of the business world. People admire your tenacity and speak glowingly about your selfless efforts. But when you’re a public entity, there’s considerably less sympathy on offer. More than that, such a move exposes all kinds of vulnerabilities. For one, it subjects a company to new rules and regulations by various governing bodies. For another, it opens it up to the risk of takeover. A public company’s shares can be snapped up by anyone — even its competitors.

While the IPO’s primary reason for existing is to provide liquidity to investors and employees (with some companies forced into it as a means to pay back investors), an IPO also furnishes a company with some collateral that can later be traded upon for future purchases or mergers. Before anything else, though, the execs of a would-be public entity need to be clear on what they’re trying to achieve before taking a step in this direction. Importantly, the objective cannot solely be to make money, a caveat Mark Zuckerberg clearly understood when he said in his letter to Facebook investors upon its IPO filing, “We don’t build services to make money; we make money to build better services.”

city at night

When is the Right Time?

This is the heart of the matter. Undertaking an IPO too early can have catastrophic effects on the future health of a business; waiting too long might allow a competitor to steal their thunder.

Its not a foregone conclusion that a company will always issue an IPO. Such a venture requires founders who have a plan that includes a defence of the company and a financial spreadsheet that’s tight and within the grip of strict controls. The public markets need to be able to trust an operation’s ability to make — and keep making — money. Investors aren’t fans of weaknesses in an IPO prospectus.

Going public involves selling your vision and future results to others. That’s where the storytelling pitch comes into play. Critical to that is the piece that describes how your business is different from — and superior to — the competition. Here’s where you need to fasten on a sustainable competitive advantage that’s definitively yours. Some questions to consider when pondering whether you’re in a position to go public:

  • Does the business have processes built into the business plan that defines a path for growth while accounting for possible change?
  • Are they delivering at least $60-$100 million in annual revenue (or $15-$25 million in quarterly revenue) — the commonly accepted benchmark for this move?
  • Can they demonstrate cash flow profitability?
  • Can the business point to a track record of accurate business-result forecasting? Knowing with reasonable precision what next quarter, or even next year, is going to look like, you’re golden.
  • Is the business reasonably invulnerable? (In other words, do they have a couple of very large customers and a dominant supplier or distributor, or are they beholden to a single platform, technology or regulatory regime?)

Wrapping it Up

There are many advantages to a company going public, including the acquisition of capital to invest in R&D or pay off debt as well as increased public awareness. But there are downsides, too, the requirement of added disclosure, the sudden presence of regulatory oversight, the time commitment of maintaining a public face, and the added cost of complying with regulatory requirements among others. Before deciding whether or not to issue an IPO, companies need to spend some time evaluating the big picture.

Courses marketplace

January 2, 2021 Update: We have just announced our BEST STOCK NEWSLETTER of 2020 AWARD!

CLICK HERE to find out which stock newsletter was up 78% in 2020 (and whose 2019 picks are now up 113%).

*** Our Award for BEST STOCK NEWSLETTER of 2020 ALERT ***

Updated January 2, 2021

At WallStreetSurvivor, we subscribe to dozens stock recommendation and advisory newsletters. There is ONE newsletter that is constantly outperforming all of the others--The Motley Fool Stock Advisor.

Five of their 2020 stock picks have doubled and the average return of all 24 of their stock picks for 2020 is up 78%!

We have been tracking ALL of the Motley Fool stock picks since January 2016. That's 5 years and 120 stock picks. As of Friday, January 1, 2021 the Motley Fool's January stock pick (TSLA) is up 720%, their March pick (ZM) is up 172%, their April pick of SHOP is up 226% and their June pick CRWD is up 120%; and another two have more than doubled. In addition, 10 of their 2019, 12 of their 2018, 11 of their 2017, 15 of their 2016. Most impressively, over the last 5 years that we have been tracking every recommendation, their average stock pick is up 209%--tht means over the last 5 years their stock picks, on average, have TRIPLED!

Now no one can guarantee that their next picks will be as strong, but our 5 years of experience has been super-profitable. The important thing about the Fool stock picks is you have to buy them the day they are recommended because they usually pop 5-10% in the first 72 hours after the release their recommendation. You sure don’t want to risk missing out on their next pick.

Normally the Fool service is priced at $199 per year but they are currently offering a NEW SUBSCRIBER DISCOUNT that allows you to get theiir next 24 stock picks for just $99/year. HERE is the LINK to visit their New Subscriber Discount page.

CLICK HERE to get access to all The Motley Fool’s Stock Picks and their next 12 months of picks for just $99 per Year! 



GET UP TO $1,000 IN FREE STOCK

WHEN YOU OPEN A ROBINHOOD BROKERAGE ACCOUNT

Robinhood was the first brokerage site to NOT charge commissions when they opened in 2013. They just past 10,000,000 accounts and to celebrate they are offering up to $1,000 in free stock when you open a new account.

Here’s the details: You must click on a special promo link to open your new Robinhood account. Then when you fund your account with at least $10, you will receive one stock valued between $5 and $500. Then, you will get a link to share with your friends. Every time one of your friends opens an account, you will receive another free stock valued between $5 and $500. Click here to learn more about this Special Robinhood offer.

Claim your free stock NOW (before it’s too late)



2 responses to “What is an IPO: Why Companies Go Public”

  1. […] shop and buy inventory. Oftentimes, companies will issue stock either privately (like Julie), or publicly (on the stock market) to raise the cash they need to invest in their […]