An Initial Public Offering (IPO) or Stock Market Launch is A Type Of Public Offering in Which Shares of A Company Usually are Sold to Institutional Investors that In Turn, Sell to the General Public, On A Securities Exchange, for the First Time. Through this Process, A Private Company Transforms into A Public Company.
Hi Everyone Today We Will Talk About Why Startups are Confused About Initial Public Offering (IPO)
An IPO is the First Time that the Stock of A Private Company is Offered to the Public. IPOs are Often Issued by Smaller, Younger Companies Seeking Capital to Expand, But they Can Also Be Done by Large Privately Owned Companies Looking to Become Publicly Traded.
A Public Offering is the Offering of Securities of A Company or A Similar Corporation to the Public. Generally, the Securities are to be Listed on A Stock Exchange.
Whether A Company is Trying to Expand or Just Paying its Debts, The Bottom Line is that Companies Seek An IPO to Raise Money.
Investing in An IPO Can Be Risky to An Investor. No One Can Guess Whether the Stock Will be Profitable Because there’s Not Enough Historical Data to Say How the Company Will Perform.
“Most Silicon Valley Companies Now are Scared of Going Public,” Josh Reeves, Chief Executive at San Francisco Based HR Startup Gusto, Said.
At Least 42% of Startup Founders in the US Do Not Expect their Companies to Go Public in the Future Up 62% from Last Year, According to A Recent Survey. Another 34% Said “MayBe” While Only 24% Said “Definitely”.
13 Tech Startups Has Gone Public in 2016 in the US.
3 Venture Capital Backed Technology Companies Have Gone Public in the U.S. this Year Acacia Communications Inc., Twilio Inc. & Impinj Inc. Raising A Total $346.3 Million, According to Bloomberg Data Through July 27. Compare that to the 12 IPOs that Raised $1.8 Billion in the Same Period of 2015.
Nasdaq Private Markets Surveyed A Group of Startup Founders, CEOs, & Directors at the South by Southwest Conference in Austin, US, on 13 Mar 2016. Nearly Half of Companies Surveyed Where 10 Years Old or Older, While Nearly A Third Where 1-3 Years Old. A Quarter Were in Finance, While Another 25% Were in Software or Hardware Tech. The Remaining Were Split Between Healthcare, Consumer Goods, Entertainment, & Other Sectors.
So If they Don’t Want to Go Public, How Do They Expect to Fund Themselves?
Just Over A Third, or 35%, of the Respondents said that Centure Capital Was their Preferred Path to Funding, While About 31% Said Private Equity.
Only 10% Said that Funding Was their Top Priority for the Upcoming Year.
The Rough Road Traveled by Companies that Went Public in 2015 is Also Causing Fear With Shares of Fitbit Inc. FIR, -0.82% , For Example, Falling 60% in the Past 12 Months.
Also, Becoming A Public Company Involves High Costs, Preparation & Greater Scrutiny, Whereas Staying Private Allows Greater Independence. Still, Companies that had Been Able to Stay Private Longer, Riding A Boom in Late-Stage Venture Funding, are Now Looking for A Perceived Opening in the Public Market as the Piles of Cash they Have Raised Dry Up.
“Every Unicorn is Watching this to See If there’s A Demand Because A Lot of them are Starting to Finance in Ways that are Somewhat Painful,” said Max Wolff, Chief Economist at Manhattan Venture Partners.
The Painful Fundraising Includes Uber, Which Is Raising A Leveraged Loan Of Up to $2 Billion, According to The Wall Street Journal, & Lyft Inc., Which has Reportedly Hired Qatalyst Partners, A Mergers & Acquisition Banker. Earlier this Year, Spotify Raised $1 Billion in Convertible Debt, the Journal Reported, Which Ties it to A Timeline for Going Public.
Early Stage Venture Funding is Still Available, But Late Stage Funding is Harder to Come by.
Analysts & Investors Say the IPO Question is A Tricky One. Entrepreneurs Don’t Want to Appear to Lack Ambition About How Far they Can Take their Company. An IPO Can Signal that they’re Dreaming Big Because the Public Market is the Only Means of Outsized Rewards.
How the IPO Process for Startups Works
An IPO of Success is A Crucial Moment for A Startup. It’s A Sign of Success. It Also Comes with its Share of Costs. Make Sure You Are Ready Before Venturing into this Stage of A Startup’s Life. Also, Don’t Do it Alone. Find A Lawyer As You Go through the IPO Process.
Financial Meaning of An IPO
An IPO Raises Needed Capital to Help A Company Grow. It’s A Payday of Sorts to Founders and Investors Who Stand to Profit. The Price of the Stock May Even Go Higher Between the IPO and the Secondary Market Offering.
There are Stories About Entrepreneurs Becoming Millionaires or Even Billionaires After their Companies Went Public. This isn’t the Case. The Companies Best Prepared to Go this Route are Ones that Already have A Solid Track Record and are in An Industry that’s Already the Focus of Much Hype.
It Also is Neither A Cheap Step for A Company to Go through the IPO Process Nor A Solution for Every Company. If You Don’t Have Audited Financials for the Past Few Years, You May Want to Think of Another Way to Raise Cash. The Same Goes if Your Industry isn’t On the Fast Track to Growth. There May Just Not Be Enough Interest there.
Companies Must Follow Specific Steps Laid Out by the Federal Government. It Can Be Costly to Comply With All the Regulations. If the IPO isn’t Successful, that May Be Money Lost.
Your Company Will Also Inviting More Scrutiny By the Federal Govt & Shareholders. Competitors Can Also Get Information On Your Company.
It’s Important to Weigh Both the Pros & Cons Closely Before Making A Decision.
Cultural Meaning of An IPO
It’s Not Only About the Money. A Successful IPO Spells Out Success for A Company. It Generates Interest and Can be A Signal to the Top Talent in the Industry that this Company has Made It. This Can Also Be A Boost to Employees’ Pride, Especially After Sticking With A Startup through Thick & Thin.
There are Other Disadvantages As Well. The Investors Become Part Owners and Get A Say. Also, Just Like the Public Will Take Notice of A Successful IPO, the Public Takes Note Of An Unsuccessful One As Well.
Consider these Factors When Deciding Whether to take Your Company Public and Go through the IPO Process. Before Making that Decision, Seek Out Legal and Financial Advice Based Specifically On Your Company.
The Public Market May Be Ready for Startups, but Fear Will Likely Keep Tech “Unicorns” Away From the Public Markets Until at Least Early 2017.
A Depressed Market for Initial Public Offerings (IPO’s) Struck in the First Half of 2016, with the Number of Deals Falling 55% from the Previous Year Amid Market Turmoil and High Cash Reserves for Private Companies, According to Renaissance Capital, A Manager of IPO Focused ETFs. Market Conditions are Improving and Late Stage Funding is Becoming More Prohibitive As the Year Moves Along, Making A Public Debut More of A Necessity, Experts Say, But that Still Isn’t Clearing the Way for Big IPOs this Year.
Most of the Fear Comes from Concerns About A Down Round, As Public Market Investors May Not Value A Company As Highly As Investors Valued It In the Private Market. There are 149 Private Startups Valued at $1 Billion or More, According to The Wall Street Journal, with Uber Technologies Inc. Leading the Pack at $68 Billion.
“(Public investors) Need A Bit More of A Discount Because they’re Not As Willing to Invest in Advance of Growth and Profitability,” said Leslie Pfrang, A Partner at IPO Advisory Firm Class V Group.
Startups that Do Receive Late Stage Funding are Often Met With Investor Protections, Which Could Include A “Ratchet,” Or Additional Shares for Investors If the Company Prices Lower than A Certain IPO Threshold.
“If You’re Doing Late Stage, the Bells and Whistles are Out,” Ganesan said. “There’s No More Vanilla Term Sheets.”
The Current Health of the Public Market is Debatable, As the Offerings that have Arrived On Wall Street Have had Relatively Small Share Offerings in A Market “Starved” for IPOs. Overall, He Believes the Market is “Overbought & Fraught,” Which Will Lead to A Correction.
We Expects Some of the Big IPOs to Go Out In Mid-to-Late 2017, Which Also Gives them Time to Grow into their Valuations. It’s Also A Matter of Time Remaining, As Historically Companies Avoid the Summer Months and Holiday Season to Launch an IPO Between Labor Day and Thanksgiving, He said.
Didi Chuxing, A Chinese Ride Hailing Company, Recently Acquired Uber’s China Operations, Which Removed An Unprofitable Segment from Uber. This Move has Caused Experts to Speculate that Uber, and Even Didi, are Preparing for An IPO Within the Next 24 Months.
For Startups to Truly Believe in the Public Markets Again, there Will have to be A Few More Companies like Line and Twilio that Come Out and Perform Well, Pfrang said. This Should Also Narrow the Gap Between Private and Public Market Valuations.
Private & Public Valuations are Already “Converging,” Which Should Ease Fears of Markdowns.
Startup investors are hitting the exits even as companies keep delaying going public.
“When you have an investor an institutional early stage investor say I have to close my fund, I have to get out, that’s a real catalytic piece of pressure,” Siegel said by telephone. “Those investors need to return capital to their own shareholders.”
Startups have dragged their feet in recent years when it comes to going public. The private funding market has been flush with cash, driving up valuations for startups. That’s left technology companies hesitant to IPO for fear of having to stomach a lower value when facing more discerning public-market investors.
According to CB Insights, there are Currently 168 Companies Valued at More than $1 Billion in Private Funding Rounds.
The beginning of the year got off to a slow start with only biotech companies with insider help and blank-check companies, which are formed to acquire assets, facing the public market. But there have since been bright spots, including the rare tech IPOs of Twilio Inc. TWLO, +1.61% and Line Corp. LN, +0.36% which both had big first-day gains.
Leading off these bright spots, Pfrang said momentum is building in the IPO market, with a “breadth” of investors and companies that have had healthy debuts.
Good Road Ahead
We’ve just witnessed one of the most surprising tech IPO markets in decades. Wall Street set record upon record throughout 2016, and tech stocks led the way, hitting all-time highs. And yet, we saw a mere 13 IPOs for venture-backed U.S. technology companies during the entire year.
Several factors contributed to this anomaly. Throughout much of the past two years, startups were more highly valued by private investors than on public exchanges. With mutual funds, hedge funds and sovereign wealth funds desperate to get into the game, there was so much late-stage capital chasing startups that many founders simply took the easy money and kicked the IPO can down the road. Market volatility ahead of the election prompted some startups to delay going public, as well.
But the reasons to wait are no longer relevant, and I believe we’re poised for a dramatic rebound. Pent-up demand and several other factors will make 2017 the strongest tech IPO market we’ve seen since the dot-com boom of the late 1990s. Don’t be surprised to see as many as 30 to 50 tech startups go public in the next 12 months. Let’s count the reasons.
13 U.S. Venture Backed Tech Companies Went Public in 2016, Most Proved to be Winners, with the Entire Class of 2016 Trading Up an Average of 56 Percent Since Going Public.
This Aftermarket Performance Has Made Technology the Best Performing IPO Sector of 2016
The Pullback in the Private Market this Year Has Forced Startups to Get Back to Basics with A Greater Focus On Sustainable Growth, Controlling Operating Expenses and Generating Positive Cash Flow. As A Result, the IPO Pipeline is Chock Full Of Quality Tech Startups that are Perfectly Poised to take Advantage of the Newly Receptive Public Sentiment.
I’ll Refrain from Touting Names, but I Can think of Dozens of Quality Startups with Top teams and Leading Products that have Reached $50-$100 Million or More in Revenues, are Growing at More than 30 Percent Annually and are On A Credible Path toward Profitability. All in All, this is the Biggest and Best Class of IPO Ready Tech Companies that We have Ever Seen.
The Stars On Wall Street are Already Aligning in A Way We Haven’t Seen in Far too Long.
A Few Sectors Stand Out, Most Notably Software-as-a-Service (SaaS), Cyber Security and Cloud Infrastructure. It Might Feel as if Silicon Valley has been Touting SaaS Companies Forever, But the Numbers Show that Corporate America’s Transition to Cloud Computing is Still Very Much in the Early Stages. And as the Allegations of Russia’s Hacking in the Recent Election Once Again Highlights, Security Continues to Become A More Important Focus with Each Passing Day.
It’s Still too Early to Know Exactly What President Elect Donald Trump Intends to Do, But He’s Spoken Repeatedly About Easing Regulatory Burdens On Small Companies. This Would be A Welcome Step.
Public Markets are More Receptive to Tech Stocks than at Any time since the Financial Crisis and Money Managers Have Tremendous Amounts of Cash they Must Invest. IPOs Remain A Key Driver of Incremental Gains and A Means by Which Money Managers Can Differentiate themselves from Competitors.
Meanwhile, Going Public Enables Startups to Provide Liquidity for Employees, As Well as Generate Much Needed Publicity and Credibility, Which in turn Bring Customers and Revenue. Companies of Sufficient Scale and Growth Would be Foolish Not to Take Advantage of Improving Market Sentiment.
The Key Going Forward Will Be to Get Pricing Right. If the First Companies Out of the Gate Do So, and those Deals Perform Well, the Floodgates Will Open. Let’s Remember that An IPO is Not the End Game; Most of the Great tech Companies have Made A Far Greater Percentage of their Returns After Going Public.