Ahh... the Initial Public Offering (IPO), the first time a company publicly sells shares of its stock on the open market. A decision that many executive teams lose sleep over nightly, and it’s not one, nor should it be, that is taken lightly. The decision process surrounding an IPO can be just a grueling as the execution itself. It can lead to countless hours of internal discussion, and potential turmoil, so why do it at all?
“Going public is a monumental decision for any company. It forever changes how a company goes about doing business. A public company has access to more, and often deeper, sources of capital than a private company. The actual process of going public can be time-consuming and presents certain unique challenges that a company should be prepared to undertake."
- Roadmap for an IPO, PricewaterhouseCoopers
Why do companies decide to go public?
According to PWC’s Roadmap for an IPO business generally decide to go public when the business requires more funding than it is able to secure from other channels under attractive terms. That said, the goals for individual businesses obviously vary greatly, and thus so do the motivations around taking a company public. But, it is probably safe to say that there are generally four areas that drive companies to go public.
Capital: Going public usually means access to additional capital. Capital that can open doors for expanding business operations, attract or retain key hires, and even assist with company expansion through acquisition of other public or private companies.
Credibility: Let’s face it, going public is a BIG DEAL, and it without a doubt increases the credibility of the business in the public eye. It shows that the company is dedicated to keeping up with federal regulations, and has the stability necessary to achieve continued success. This public confidence can swing open doors heavy doors when attracting new customers-which means continued growth and greatness.
Valuation: When a company is private it is not uncommon for its stock’s value to, well, be inflated a bit. (Ughem, dare we bring up the “Unicorn Phenomena!”) But, when a company is public its total worth, a.k.a market capitalization, is undeniable. It’s simple really, the company is worth whatever it’s stock price is multiplied by the number of shares, and that is that.
Liquidity: Public companies give their shareholders the ability to gain financially in return for their support of the business. For startups, this can be the carrot in-front of the horse (or unicorn if you will). The promise of liquidity can entice investors and employees alike early on, so owning up to the promise encourages dedication and commitment to the success of the business.
Regardless of why companies choose to go public it's important to mention that publicly held companies are under more scrutiny than privately held organizations, and require stringent organization in order to meet federal regulations. They are required to document and report all of their corporate information or risk facing considerable fines, or even legal prosecution. So while the hard work is most often rewarded, its not all butterflies and rainbows. It takes a lot of grit and determination to have a successful IPO.
Up next: Get tips for managing the trasition of taking your company from private to public in Part 2 of the 4. Part IPO Blog Series. This blog will be published on Tuesday, October 27, 2015. If you'd like it delivered directly to your inbox subscribe to the SecureDocs Blog now.