Defining IPO: Why is it a Huge Step for a Company?
Defining IPO: Why is it a Huge Step for a Company?
Defining IPO: Why is it a Huge Step for a Company?

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Stock market

Defining IPO: Why is it a Huge Step for a Company?

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Being an entrepreneur is not for the faint of heart. Anyone who’s started a company knows that it takes proper discipline to be successful. But what does it mean for a company to be successful? You might have heard people refer to obtaining an IPO as a standard of success.

It is important to remember that each individual has their own standard for success. However, there are certain milestones that every business will eventually cross. Some of the milestones that Forbes lists include having a revenue model and a customer acquisition strategy.

Milestones like these are perfect for companies just starting out and fundamental for accomplishing any sort of success. For larger and more established companies, they have already crossed these milestones. It is at this point where companies will consider an IPO.

IPO for Beginners

We know that IPOs become an option for companies once they’ve reached a certain level. So the question then becomes, what is an IPO?

As defined by Investopedia, an Initial Public Offering, or IPO, is the first time that a private company will offer shares to the public. To simplify, an IPO is the process a company goes through in order to have its shares publically listed on the stock market.

What’s the purpose?

As with any business venture, there is a financial motive when it comes to pursuing an IPO. It serves as a way for a company to earn more revenue. And, later, they can apply it to expand the business. If nothing else, going public on the stock market, can also benefit the founding investors of a company.

More than that, IPOs offer a good chance for these newer companies to gain public visiblity. It is always buzzworthy news when a new company makes the switch from private to public. That’s because the opportunity to buy stock in a new company is very appealing to investors. If they can get involved early enough in a company that does well, investors will be able to make a profit as the share prices increase. The prospect of profit coupled with the scarcity of the shares, are the driving forces that help these emerging companies gain publicity.

Is an IPO for Everyone?

While IPOs seem like a great thing for companies and investors, it is not a get rich quick situation. In fact, there are quite a few steps that have to be taken before an initial public offering can be made. The process to publicly list a company may vary from country to country. Though in the United States, the process is approximately four months long and includes registering any and all transactions with the Securities and Exchange Commission.

The company itself will rarely handle the task of registration itself. Normally the help of an investment company serves as an underwriter. As an underwriter, the investment firm will essentially buy the stocks from the company and then resell them to the public.

Until this point, we have focused on the positive aspects of IPOs. Now it’s time to look at what a company is subject to once it does decide to go public.

As mentioned before, public companies normally gain more publicity. After this type of publicity, usually, comes public scrutiny. It happens once the mission statement and social impact of the company are now a determining factor for whether someone plans to make the investment. 

Also, as a company gains more shareholders, there are more opinions that have to be taken into consideration. Arguably it is much easier to run a company when you only have to consider what will make a handful of investors happy. Compare that to having to come up with solutions that benefit hundreds of shareholders with different motivations and backgrounds.

Additionally, once a company goes public with an IPO they accumulate further reporting requirements. They also accrue further marketing and legal costs.

When are You Ready?

For those who do want to go through the IPO process, it is another form of fund raising that larger companies may choose to engage in. This is an option normally considered once a company has become stagnant in its progress, so an IPO is seen as a way to boost revenue and help with expansion. The main deteminant of whether a company is ready to go public with an IPO is its profitability. 

In order to assuage the worries of investors, a company has to prove that it is scalable and able to maintain its growth. As a rule of thumb, Vox states that a company looking to go public should “scale around $100 million in revenue.”

Timing for an IPO is unique to each company based on the circumstances surrounding it and the goals set forth by the leadership. Although it is typical for larger companies to go public, it is not a requirement, as there are many large private companies. Ikea, Cargill, and Huawei are examples of large companies that are still privately held. So while it may be exciting to be part of a publicly-traded company, you shouldn’t feel pressured to use it as a measure of success.

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Credits:

Dara Douglas

EDITORIAL TEAM

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Author:

Dara Douglas

EDITORIAL TEAM

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