What is an IPO?

Summary: Discover what is an IPO from this article and how it is important to a startup. 

Image: NDTV Profit

IPO, a short for Initial Public Offering, is when a private company sells its shares or stocks to the public for the first time.

IPO is also referred as “going public”. Normally, before “going public”, the company is considered private and its shares are limited to a small number of shareholders which usually consist of families, friends, venture capitalists and angel investors. The public would not be able to purchase the private company’s shares even if they want to.

It is not until the private company goes public by having the IPO then the public can purchase its shares. Through this process, a private company turns into a public company.

Why is IPO important to startups?

IPO raises a great deal of money for the company in order for it to grow and expand. Private companies have many funding options to raise capital such as borrowing or seek for private investors. But, by far, IPO raises the largest sums of money for the company and its early investors. If a company can convince people to buy stock in the company, it can raise a lot of money.

Small companies which seek for further growth, often use IPO as a way to generate the capital which can be used to fund research and development, fund capital expenditure, or even used to pay off existing debt.

IPO can also generate publicity and increases public awareness about the company by making their products or services known to the public with new potential customers. By increasing the company’s exposure, it can also help to increase the company’s sales and profits. Subsequently, this may lead to an increase in market share for the company. 

An IPO may also be used as an exit strategy. When a company decides to raise money via an IPO, it is only after careful consideration and analysis that the exit strategy will maximize the returns of early investors and raise most of the capital for the business. Therefore, in an IPO, many of the founders’ and investors’ shares were sold to the public.

An IPO of success is a crucial moment for a startup. A successful IPO signifies success for a company and expresses to the top talent in the industry that this company has made it.

Significant IPOs

Alibaba Group

Image: Forbes

Alibaba Holdings Group, an e-commerce company based in China, entered the public market on September 18, 2014 and raised $USD21.8 billion (RM94.25 billion). Four days later, underwriters exercised an option to sell more shares and brought as total the IPO to $USD25 billion (RM108.09 billion).

VISA

The debit and credit card company was listed on March 18, 2008, and raised $USD 17.864 billion (RM77.24 billion). It is the largest IPO for a US company.

Facebook

Image: Business Insider

The largest technology IPO in US, Facebook went public on May 1, 2012 and raised $USD16.007 billion (RM69.21 billion).

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