For some private companies, IPOs are often considered as the Holy Grail. But what is an IPO exactly, and why is it sought out?
When a privately held company turns to the public to raise capital on the stock market for the first time, the process is famously called an Initial Public Offering, shortened to IPO, which is a public offering of shares that are sold to investors on a stock exchange. The company receives funding through this process in exchange for giving up some equity.
After a privately held company issues an IPO on a stock exchange, it is transformed into a “public company”. Only then the shares of that company can be traded, i.e. bought and sold freely among the public.
Capital raised through an IPO is liability-free money. Companies can use the money as they choose, whether it is to open new offices, hire new people, or change direction.
The significance of IPO for businesses backed by Equity Crowdfunding:
Many startups and businesses consider crowdfunding as a helpful pre-IPO operation before they actively break out on a stock market. In a sense, it’s a way to test the waters. A successful round of equity crowdfunding not only brings the company funds, but a lot of positive PR.
Incidentally, one of the most resourceful ways to raise liability-free capital for a privately held company is through equity crowdfunding. The process is simpler and efficient. It allows enterprises to mobilise the masses to invest in their business model in exchange for a piece of the company.
For investors, it is an opportunity to grab a stake in a seed-stage company at very reasonable prices, which would ideally earn them exponential returns when the business eventually matures and achieves a successful exit.
Nonetheless, securing an IPO is one of the most sought-after exits that both investors as well as enterprises seek to attain. When the stocks of a company begin to trade freely on a stock exchange, investors usually get massive capital appreciation on their initial investment. With that, investors can either choose to hold or liquidate their stakes.
Equity crowdfunding is gaining momentum across the world, with more and more companies opting for this financing method to leverage their business model. Apart from IPO, other successful exit strategies for equity-crowdfunded ventures are mergers and acquisitions as well as venture-capital funding.
In conclusion, an IPO is a great way to access liquidity and at the same time it offers an exit possibility.