IPO and Stocks
Moving past private equity funding, most companies would see the option of taking their company public through IPO to raise a larger amount of capital that is beyond the limit of private equity funding. At such stage, Many startups and founders see this as an opportunity to exit from their companies by putting their shares up.
On the surface, the general media loves to mention that it’s an exit for the founders. They will hype the potential networth of the founders once an IPO take place. However, they typically fail to stress the main reasons why a company is preparing an IPO. It’s fundamental for anyone who wants to participate in investing to know what is the reason the company is requiring these money and how are they planning to allocate their capital. As a rational stock investor, one should shield these noise and identify the true value of a company in comparison with the value overblown by the hype.
When a company plans to launch an IPO, they would have to work with an investment bank to prepare the prospectus for filing an IPO. These investment banks service companies as underwriters and gets a cut when companies goes to IPO. The lead underwriter that prepares the books of the company is also called the “book runner”. The IPO is a huge process requiring the underwriter to prepare the books and ensure that they are attractive for investment. The accounting firms have to ensure that the books are audited. The lawyers have to ensure that the legal terms to selling the stocks are acceptable. In addition to these, the executives of the company launching the IPO will work with the investment banks to participate in a road show to draw interest in their IPO. The key is to ensure that there are strong interest from the buy side in acquisition of the stocks that the company is releasing. The company have to “sell” their vision why an IPO has to take place and how can the value of these stock will grow with this new capital.
Listing company’s stock onto the exchange is one of the key mechanics of capitalism. It is a stage where companies have to be transparent on their business and operations to raise capital from the public. Companies can choose to sell more stocks after listing or raise capital through other forms of debt instruments such as loans and bonds.