‘Going public’ can mean a few different things. In the modern dating world, you might hear it when your friend is soft-launching their new partner, or when a celeb announces a new relationship. But in the world of business, it means offering shares of your company out to the public.
This move is a major milestone for any company, signifying a transition from a private entity, where shares are owned by a limited group of investors, to a public one, where the general public can buy and sell shares on the stock exchange.
At the beginning of last year, we profiled 12 companies we thought might IPO in 2023—and now we’re revisiting them to see if our predictions played out.
What is an IPO?
In case you haven’t read our original article, an IPO stands for Initial Public Offering. It refers to when a private company goes public in order to generate capital—to further growth, reduce debt, or fund other business ventures.
How does it work? A private company will offer the public to buy shares of the company. This process involves several steps:
- The company selects an investment bank to underwrite the IPO
- The company and the investment bank prepare a registration statement to submit to the Securities and Exchange Commission (SEC) for approval
- Marketing the shares
- Going public i.e. the company's shares are listed on a stock exchange
- After the IPO, the company must adhere to higher standards of transparency and regularly disclose financial and business information
Advantages of an IPO
A company might choose to go public because, in its most distilled form, it needs to raise capital. Capital is used for a number of things: funding research and development, paying off debt, expanding the business, and more.
On top of that, an IPO generates brand awareness. Alibaba can lay claim as ‘the most hyped IPO of all time’. According to Deal Room, an underwriter during the time said he’d never seen anything like it—the stock finished 38% above the initial listing price, at the end of its first day. It caused a big stir, and threw Alibaba into the spotlight.
Similarly, offering the company out to the public will automatically put you on the radar, and get you in front of new audiences—leading to a raise in value of the market share.
It can also be used as an exit strategy. An IPO exit strategy is the game plan used by early backers like venture capitalists or private equity firms to cash in on their investments. It’s a key move for these investors to sell off their shares and turn their investments into actual money once the company’s shares start trading on the stock market. An IPO exit strategy is mainly designed with the early investors’ goals and needs in mind.
Disadvantages of an IPO
Of course, there are also disadvantages to an IPO. One of the main reasons is that as a founder you’d need to give up total control, and answer to the shareholders. This can be a hard pill to swallow when you have a clear end goal with your brand.
In addition to this, preparing for an IPO is expensive. Costs include underwriting fees, legal fees, accounting costs, and other expenses. The process also demands considerable time and attention from the company’s senior management and staff, which can divert resources away from day-to-day business operations.
Other disadvantages:
- Increased public scrutiny and stricter regulatory requirements
- Public companies often face pressure from shareholders to produce positive short-term results, meaning less focus on long-term goals
- Share prices of public companies can be volatile and are affected by market conditions, economic factors, and investor sentiment, often beyond the company's control
- Being a public entity increases the risk of facing legal challenges, including shareholder lawsuits if the investors feel misled or if the company's performance does not meet expectations
- And more
