An Initial Public Offering or IPO is a process where a private company owned by a few shareholders goes public and gets listed on an exchange where more investors can buy into the company.
Whether a company is old or new, they all have the potential to sell shares through an initial public offering by meeting a specific requirement of the Securities and Exchange Commission (SEC).
An IPO can be beneficial for the company to raise capital from public investors. However, it comes with specific responsibilities, including filing a ton of paperwork and financial disclosures, required by the SEC. The process of IPO is commonly referred to as the company “going public.”
Why Does a Company Go Public?
The decision for a company to go public should be based on careful consideration by its board of directors. They have to evaluate every angle to ensure that the decision would be the right choice for all the stakeholders. However, if the timing is perfect, the benefits can be tremendous. These are only a few reasons why a company would like to go public:
- The company can raise capital without venture capitalists’ restrictions or risk of debt,
- Provides more funds for advertising and development of new products,
- Publicity and media coverage,
- Customers trust publicly listed companies because they have undergone a detailed regulatory audit,
- More influence towards different vendors, mainly business-to-business deals,
- Top-tier talents would usually want to be associated with publicly listed companies,
- It provides an exit for early investors and company insiders to sell their equity and potentially profit. An IPO may sometimes be seen as a liquidity event where it becomes easier for early stockholders to trade their shares.
The above mentioned benefits are not without cost. Aside from the fact that a company would need to spend money on hiring advisors such as lawyers, investment bankers, and accountants to prepare for an IPO, they should also be ready to face significant responsibilities toward their shareholders, such as financial reporting.
As a company goes public, so does most of its information and data. Public scrutiny will be apparent as investors rely on this data to decide whether to invest or not. It is crucial to be prepared before taking this giant leap.
The Process of Initial Public Offering
Launching an initial public offering (IPO) is a complex process, so your company should navigate it carefully, with good preparation and executive precision. The process includes several steps and the involvement of financial experts and consultants who will make sure that the transition from private to public is smooth sailing. Here is a breakdown of the IPO process.
Developing Comprehensive Strategy
Before you even start the IPO process, your company must conduct a thorough evaluation of operations, market position, and long-term goals and objectives. Based on this review, it is possible to determine if going public is the right choice for the company at this moment and if that will positively contribute to future growth and stability.
Choosing an Investment Banking Partner
Selecting an investment bank to oversee the underwriting process is also important. Companies usually base their bank choice on the bank’s industry reputation, research quality, expertise in a particular sector, and ability to attract investors. Also, the bank’s ability to secure share prices can influence the decision, as well as the overall success of the IPO.
Due Diligence and Underwriting Strategy
An investment bank and a company starting an IPO should agree on the way the bank will sell the company’s shares. The agreement is usually done through a “best effort agreement”. Based on the agreement, the underwriters do their best to sell the securities, but they do not guarantee the amount that will rise. Sometimes, banks can team up and for a syndicate to expand outreach and distribute the IPO among multiple stakeholders.
Developing a Prospectus
The prospectus is a detailed document that states the company’s financial performance, potential challenges, and opportunities. It provides transparency and important insight into the company’s value proposition and market position.
Filing Regulatory Documentation
There are a lot of documents to be filed before an IPO, including the engagement letter between the company and the investment bank, an underwriting agreement, and the registration statement that has to be filed with the regulators.
For example, one of the documents, identified as an SEC form S1, is a very important step in the process. Submitting this form signals the intention to go public, providing potential investors with information about the company’s financial health, general business operations, and risks associated with investing.
Marketing and Pricing the IPO
To attract interest and secure funding, companies seeking to go public must actively market their initial public offering to individuals and institutions that may invest. This is done through the process called investor roadshow, which involves the presentation of the company’s vision, general financial data, and growth potential to different stakeholders. Through the process, a company can generate enthusiasm and build confidence among potential investors, which ensures a successful launch in the public market.
In terms of pricing, although the investment bank will attempt to market the deal at a specific price, the investors will ultimately decide how much it’s worth. Factors that might affect the price usually revolve around the condition of the market economy, the company’s goals, and the company’s past achievements, if any.
Transition to Public Trading
On the day of the IPO, there should be an initial price, and the stock begins to be traded publicly. This final stage of the process is where the company would transition toward market competition, where the investors who bought shares would now rely on factors such as news, financial results, and other public disclosures to drive the performance of its shares. The underwriter continues to act as an advisor and provides financial data for the issuing company.
How Does an IPO relate to Startup Marketing?
Launching a well-executed marketing campaign, as a part of your startup’s development strategy, can significantly enhance the company’s visibility and reach. By building brand awareness and establishing a strong market presence, your company can familiarize the general public, potential customers, and investors with the products or services you offer.
Marketing campaigns before an IPO also serve as an opportunity to showcase the company’s unique value proposition, address any concerns, and establish credibility in the industry. Additionally, developing a strong social media presence, public relations, and content marketing strategies can help create and increase audience engagement. That way, you can attract both retail and institutional investors.
Developing good marketing strategies for a startup can sometimes even lead to higher interest during the IPO process, because the public is already acquainted with the brand. Also, connecting with potential investors on a personal level and creating that emotional connection can work in your favor.
Measuring the Performance of an IPO
As part of setting up the IPO, as mentioned in the process above, a company and its underwriters will determine the initial valuation for the company. If the price is deemed undervalued by the investors, they can potentially and aggressively bid up the price and vice versa.
Before investing in initial public offerings, an investor should look at the fundamentals of a company’s financial performance, as listed in the company’s prospectus, and SEC filing to determine the value of the company’s shares more accurately. Investors can identify the company’s expected growth rate, potential risks, and general outlook from this data before making an investment decision.
Because there are a lot of things to consider, working with a reliable and experienced broker, like Network 1, Charles Schwab, Vanguard, or others, can really help you make up your mind and make good investment decisions, especially if you are a beginner.
Network 1 highlights all factors you should evaluate before deciding to invest in an IPO, which, among others, include the industry a company operates in, the quality of the management team, the current market valuation, and the future capital requirements.
