When Indian Railways went public in October, the stock market had a field day.
WeWork, on the other hand, had a bad experience.
But, what exactly does “going public” mean? What is IPO? What must startup founders know about it to avoid a sticky wicket? We are going to cover all this and more in our blog post.
IPO – A brief
IPO stands for Initial Public Offering. It means that the founder is ready to offer shares (a part of the ownership) of his/her company to the public. Often, people mistake the IPO price as the value of the company. That’s not the case. The IPO price is usually what is estimated to be its value in the market and it is often lower than the actual value.
Why do companies go public?
Before an IPO, a business is private. Private businesses do not have many shareholders. Their funding usually comes from family, friends, angel investors, or VCs. This can only take a company so far. When it starts growing exponentially and is mature enough to meet the standard regulations, it can consider going public.
Going public helps get that additional funding and this opens up massive investment opportunities. It also strengths credibility and market value. Moreover, companies with an IPO attract a stronger workforce because company stocks work as incentives to many employees.
The other side of the coin – the cons
Going public is quite risky and every founder must be aware of what he/she is getting into before biting the bullet. Also, to go public, the company must spend a lot of money. Audit fees, generating reports, accounting, and investor-relation departments are a few examples. It is a very time-consuming process as well.
However, the reason why we call it risky is that going public creates a lot of pressure on a company, especially if it is a startup. Public companies get publicity for their products but along with that publicity come expectations and stress. This usually causes the company’s management to make decisions that are only effective in the short-term, ignoring the long-term goals altogether. A few companies may also end up making questionable choices.
Being safe while going public
Since creating an IPO comes with its pros and cons, startup founders must exercise caution and evaluate every aspect before going forward. This is why the underwriting process, the first step in the IPO process, is important. For underwriting, you must hire an investment bank and work closely with to decide what’s best for the company.
IPO is a see-saw that can swing either way. To tip the odds in your favor, you must have a strong finance team, a clear plan, and enough funds to cover the costs.