In the financial world, the decision for any company ‘going public’ is a huge one. The term ‘going public’ is the process through which a privately held company issues stock to the public for the first time. Also known as Initial Public Offering (IPO), the term going public holds a lot of relevance for companies in the present financial world. Tracing back history, in 1602, the Dutch East India Company was the first company to issue bonds and stock to the general public. Thus, it became the first official traded company to be listed on the official stock exchange.
Today, it is visible that the companies that go through an IPO are more recognizable and gain the attention of potential customers. For example, HDB Financial Services Limited is one company that has earned goodwill for being an unlisted company. As a potential investor, if you’re willing to buy or sell shares, first, you should check out the best place to buy unlisted shares in India, and then proceed further. It can be said that public companies are more transparent than private companies because they need to reveal information like their financial statement results. However, going public is a little complex decision which requires thorough planning and decision-making.
In the book The Entrepreneur’s Guide to Capital, Jennifer Lindsey explains, the ideal candidate for an IPO is a small-to-medium-sized business in an emerging industry with annual revenue of at least $10 million and a profit margin of more than 10% of the revenue. Further, it’s also significant for a company to have a stable management group, capitalisation featuring no more than 25% debt. As the stock market is touching new heights, the company needs access to more capital and public recognition to support its strategies and expand growth in the long run.
Presently, established companies can easily choose the route of an initial public offering to raise capital through selling shares of the company. IPO might not be a suitable option for bootstrappers and small & medium-sized businesses; therefore, it requires capital before going public. Here are some secrets why companies would want to raise funds before the IPO.
- The IPO might be a little expensive related to the annual profit for small-to-medium-sized businesses. Therefore, getting investors on board to fund the IPO makes sense so that nothing comes out of their pocket.
- Since IPO can be a lengthy process for the companies to finally get listed on the stock exchange, companies need initial IPO funding to grow and procure greater market recognition.
- IPOs generally require market markers to be successful in their business. Market markers want to push hot companies already attracting potential customers through their shares or bonds. That’s why companies need capital funding before going public.
- IPO considers companies that have a high valuation in the market. That’s why small and medium-sized companies seek ways to generate their capital before they can get listed in IPO.
Sometimes, pre-IPO companies‘ business models work, and they unlock the potential to make money. However, when these companies go public, their valuation skyrockets, and they start competing with much larger rivals in the money market. Further, investing in pre-IPO companies can also give customers high ROI. It means pre-IPO companies tend to be small by definition; however, the results they bring are exceptional.
For instance, Uber was valued at more than $60 million on its way to becoming a publicly – traded company, whereas GrabTaxi started with just $7 million in funding. It means that if customers had invested $1000 in Uber before it went public, they could have received shares worth $7 million today. However, Uber was already famous when it got listed on the stock exchange, and funding was needed if the company wasn’t known.
Considering the same thing, pre-IPO funding is a requisite for companies to maintain their corporate identity and to be recognized in the financial world. Undoubtedly, going public is challenging and time-consuming. It becomes a cumbersome process for most companies to navigate alone; therefore, pre-IPO companies have stringent requirements before going public. Further, it is also relevant that pre-IPO funds raised by companies help them in running their operations before going public. Undoubtedly, all the major companies are listed on the stock exchange; therefore, listed companies are known to be larger and more efficient than other unlisted companies. So, when it comes to raising pre-IPO funds, it’s crucial for the companies to spend an enormous amount of money trying to comply with the regulations resulting from such listings.
Indeed, an IPO is one of the crucial steps for a company because it serves as a gateway to raising additional funding. Thus, it allows a company to grow beyond its initial setup. Further, going public also shows that the company is being transparent and credible, which will be a factor in attracting new investors and whenever seeking to borrow more funds in the future.