The Insider's Guide to Navigating an IPO

What is an Initial Public Offering (IPO)?

An Initial Public offering (IPO) is when a private company sells its shares to the public. Once the process is complete, the company transitions from a private entity to a public company with shares trading in the market. This enhances a company's reputation,  value, and visibility. The move to public ownership also brings startup companies transparency, supervision, and prestige.

An IPO allows companies to obtain equity capital to support their activities, grow their business, make acquisitions, and establish themselves as industry players. It marks an achievement and progression for private companies aiming for success.

The IPO Process Step-by-Step

An IPO is a complex, multi-step process that requires extensive preparation and coordination among various parties.

The key steps needed to bring the process to fruition  are:

Step 1: Finding an Investment Bank

Companies usually choose a brokerage firm and a couple of investment banks to oversee the IPO process. These financial entities provide advice on meeting requirements and help prepare and file documents with the SEC to gauge investor demand and set IPO share prices.

Step 2: Research and Regulatory Submissions

Upon engaging brokerage firms and investment banks, the private entity going public will carry out research to provide potential investors with much-needed information for analyzing the IPO. In addition, they must make necessary regulatory submissions for approval. This includes the "S-1," a registration statement highlighting the company's operations, financial status, leadership team, and other potential risks.

Step 3: Pre-marketing and Book Building

The underwriters gauge investor demand for the IPO by compiling an order book. They meet with institutional investors to promote the IPO and assess the level of interest. This process is known as "book building" and helps determine the IPO price.

Step 4: Pricing the IPO

The underwriters and issuing companies determine the price per share for the IPO based on book-building results. The offer price aims to maximize the company’s proceeds while ensuring sufficient demand for shares when trading and secondary offering begins.

Step 5: Allocating Shares

According to projected demand, investment firms would distribute the shares to institutional and retail investors. There are specific guidelines to oversee the distribution process and to ensure its fairness and that they are systematically distributed.

Step 6: Going Public

On the "IPO date." the company’s shares would begin trading on the stock exchange. It ended the IPO process and started its transition from being considered private and into a public company.

Step 7: Post-IPO Support

After a company goes public, underwriters help stabilize the trading of the new stock during the lock-up period. They also provide research coverage to generate ongoing investor interest. Since many participants are in the process of a company going public, it is essential to carefully prepare and adhere to rules ensuring a safe and successful IPO journey.

Considering Whether an IPO is Suitable for Your Business

An IPO may seem appealing for privately held companies seeking to raise funds and broaden their pool of investors. Yet, opting for an IPO entails expenses, risks, and continuous responsibilities. It is crucial for companies to thoroughly assess the advantages and disadvantages before deciding if transitioning to a traded entity aligns with their goals.

Advantages of an IPO

  • Raising capital - The most significant advantage of an IPO is its increased access to capital from different sources. The company can quickly generate large sums of capital by selling shares on the public market.
  • Increased public profile - Being a public company raises visibility and brand recognition. This can help attract top talent, strategic partners, and new customers.
  • Liquidity for early investors - An IPO allows founders, employees, and early private investors to convert ownership stakes into publicly traded stock. It provides liquidity and exit opportunities.
  • Improved company valuation - Valuations typically increase after an IPO, especially if demand for the shares is high. This improved valuation can boost the company's borrowing power.
  • Company prestige - There is often prestige associated with being a public company, which can enhance business relationships and terms with vendors.

Disadvantages and Risks of an IPO

  • Significant costs - The costs to go public can be $1 million or higher. There are underwriter fees, legal costs, accounting expenses, registration fees, and more.
  • Loss of control - Founders and executives lose some control as they now have public shareholders. They must answer to a board of directors.
  • Increased regulations - Public companies face amplified scrutiny, regulations, and reporting requirements compared to private firms.
  • Short-term focus - Management may need to focus on quarterly earnings results and short-term share price rather than long-term vision.
  • Disclosure requirements - Being public means disclosing sensitive financial information, business practices, executive pay, and other details competitors could use.
  • Market volatility - Stocks can experience price swings, speculation, and irrational investor behavior outside the company's control. This can be a distraction.

Analyzing Readiness for an IPO

Before pursuing an IPO, companies should honestly assess their readiness to raise capital across factors like:

  • Financial health - Are revenue, profits, and cash flows consistently strong and likely to impress investors? Is there a convincing growth story?
  • Management team - Is there a well-rounded team with prior public company experience? Are governance and controls strong?
  • Competitive position - Does the company have a dominant and defensible market position with competitive advantages?
  • Industry dynamics - Is the industry outlook robust, growing, and positioned for future success? Are macroeconomic conditions favorable?

Use of proceeds - Is there a reason for the company to seek a capital investment to support its growth? Researching these aspects will help determine the strategic value of this decision and evaluate the associated costs and responsibilities.

IPO Pricing and Valuation Methods

Setting the price for an IPO is crucial during the process. It establishes the company's value and decides the amount of capital to be raised. Various essential elements impact IPO pricing.

Financial Performance and Metrics:

Historical financial performance, including revenue growth rates, profits, rates, and other metrics, is a reference point for determining overall value. Factors such as revenue multiples, P/E ratios, and discounted cash flows play a role in setting valuation estimates.

Industry and Market Conditions:

IPO prices are heavily influenced by the performance of public companies in the same industry and overall market sentiment. Times of high market volatility generally depress IPO prices.

Investor Demand:

The underwriters gauge interest from institutional investors to assess appetite for the IPO. Strong demand can support a higher price per underwriting agreement, while weak demand may necessitate underpricing per underwriting agreement.

Quality of Underwriters:

The reputation and track record of the underwriters in pricing IPOs provides credibility. Well-known underwriters can maximize value.

Company Size and Profile:

More extensive offerings from high-profile companies tend to achieve higher valuations. Smaller, lesser-known companies usually need to underprice to generate interest. The underwriters play a critical role in IPO pricing using two main models:

Book building:

The underwriters assess demand by building an order book from institutional investors. This helps guide the pricing and allocation of shares.


Some successful IPOs now, especially smaller ones, are priced through a transparent auction process. Investors bid for shares based on willingness to pay. Proper IPO pricing is essential for the company to raise adequate capital while leaving some upside for new public investors.

IPO Due Diligence

Getting ready for an IPO involves a lot of work and careful planning. This process usually takes around 12 to 18 months. During this time, the company assembles a team of experts, thoroughly examines its operational details, creates a prospectus, and ensures it complies with all regulations. The due diligence phase for an IPO is incredibly important because it helps identify any issues or risks and deals with them proactively. It requires an investigation into every aspect of the business, such as:

  • Audits and Future Predictions - The company needs to have its records examined by an auditor for the last 3 to 5 years. These audited financial statements are crucial for the IPO prospectus and filings. Additionally, the company needs to develop forecasts of its financial performance.
  • Building the IPO Team - The company must have a strong team of investment banks, legal advisors, auditors, and other professionals to oversee the process.
  • Compliance Evaluation - The company assesses its business operations, internal controls, compliance policies, and risk management protocols to identify any areas that require attention. All operations must adhere to requirements.
  • Creating the Prospectus - The prospectus offers investors information regarding the company's business model, risks involved, financial status, and management team details, among other key aspects. Preparing this document is crucial as it serves as a basis for responsibilities.
  • Assessing Investor Interest - The underwriters will gauge market demand for the IPO by engaging with investors to measure interest and approximate valuations.
  • Changes in Corporate Governance - The company needs to set up governance guidelines such as having a board with members implementing shareholder rights strategies and putting financial controls and policies suitable for a publicly traded company in place. Conducting diligence and having proper preparation are essential to ensure a seamless IPO process and the shift to operating as a public entity. This instills trust in investors that the company is well prepared for market demands.

Marketing and Promoting an IPO

A critical part of the IPO process is generating interest and demand among potential investors. The investment banks underwriting the IPO lead this marketing and promotion.

Generating Investor Interest

The underwriters will leverage their extensive connections and relationships within the investment sector to promote the IPO. This involves showcasing the public offering to investors such as hedge funds, pension funds, and insurance companies who can acquire substantial shares.

Additionally, retail investors are a focus through investment newsletters and online brokerages. The aim is to inform investors about the company's operations, financial status, growth potential, and worth. Investor materials disclose financial information, like the preliminary prospectus is circulated.

Roadshows and Presentations

The company’s top leaders are set to embark on an IPO "roadshow" to deliver presentations to investors nationwide and even abroad. This platform allows management to share their narrative and generate enthusiasm among investors about the company founders' prospects for future growth.

Roadshows usually involve a schedule of meetings as the company aims to connect with a range of potential investors. The management team often meets privately with major institutional investors as well.

Setting Expected Valuation Range

Based on investor feedback from the roadshow, the underwriters will set an expected price range for the IPO. This helps establish market demand and likely valuation. Setting the range too high can turn off investors, while too low leaves money on the table. The preliminary offering price and range is included in an updated SEC filing. But the final offer price isn't set until just before shares start trading.

Building the Order Book

In the days leading up to IPO pricing, underwriters will start taking orders from interested investors to build an "order book." This helps gauge overall demand and determine the price. Institutional investors indicate how many shares they want and at what price. The order book determines where supply and demand meet to establish the IPO price.

Allocating IPO Shares

After the IPO price is established, the next crucial stage involves deciding on the distribution of shares between retail investors and company insiders. The underwriters oversee this task, managing the balance between the supply of purchased shares from private shareholders and the demand for selling shares.

Allocation to Institutions 

Typically, 60-70% of the investment is assigned to institutional investors, such as mutual funds, pension funds, and hedge funds. These major players typically make investments in millions of dollars to acquire shares. Satisfying institutional demand is critical for a successful IPO.

Retail Allotments 

The remaining 30-40% of shares are offered to retail investors and the general public. These individual investors typically either purchase shares or receive smaller allotments of allocated shares, valued at a few thousand dollars. Retail participation helps provide stability to the shareholder base.

Book Building 

To determine allotments, underwriters engage in a process called book building. They assess demand by gathering orders from institutional and retail investors to build a "book" of interest. This helps them determine the appropriate share allocation.

Over-Allotment Option 

Underwriters may over-allot shares, issuing more than the available supply, to help stabilize the stock price. This involves an option known as a greenshoe that allows underwriters to sell extra shares if needed. The standard over-allotment option is 15% above the IPO supply. Careful share allocation and book building help ensure a successful IPO launch. Getting the balance right between institutional and retail investors is an art that underwriters work hard to perfect.

Life as a Public Company

After an IPO, a company's journey in the markets only starts. Upon listing, the company must adapt to regulations, reporting obligations, heightened market competition and rivalry with early investors, private valuations of new stocks, and increased attention from the investing public.

Reporting Requirements

As a public company, regular financial reporting is required by securities regulators and stock exchanges. This includes filing quarterly and annual financial statements and disclosing any material events or changes in the business. Companies must have strong financial controls and accounting procedures to produce accurate and timely reports.

Following Regulations

Public companies must comply with regulations on insider trading, executive compensation, corporate policies, and governance rules. Dedicated personnel are required to handle compliance. The board of directors takes on greater importance as well.

Adjusting to Added Scrutiny

Unlike private companies, public entities are subject to heightened scrutiny from shareholders, analysts, media, and the public. Management teams and executives need to get comfortable engaging with market stakeholders. Earnings calls and annual shareholder meetings require preparation.

The company's public image and stock performance will be constantly evaluated. In summary, the regulatory responsibilities and public visibility of being a listed company differ greatly from operating as a private firm. Careful planning is required to ensure a successful transition in the post-IPO stage.

Alternative Routes to Going Public

Going public via an IPO is one of many options for private companies looking to access public markets. Here are some alternative paths companies can take to go public:

Direct Listings

It is a listing whereby shareholders in private entities list their shares directly on a stock exchange without issuing new shares or raising additional capital. The process averts unnecessary costs and complexities of a traditional IPO.

In a direct listing, current shareholders can sell their existing shares to public market investors on the first day of trading. The opening price is determined by an auction process based on market demand. Direct listings have lower fees than IPOs since they do not require underwriting services. Examples of successful direct listings include Spotify, Slack, Coinbase, and Roblox.

SPAC Mergers

A SPAC (special purpose acquisition company) is an entity that raises capital through an IPO to acquire an existing private company and take it public. Ultimately, the private company merges with the SPAC and becomes a publicly traded entity. SPACs provide a faster, more streamlined path to going public than traditional IPOs tend to. They also allow the private company target to provide forward-looking projections when announcing the merger. Examples of companies that went public via a SPAC include DraftKings, Virgin Galactic, and Opendoor.

Reverse Mergers

In this case, a private company becomes publicly traded by acquiring and merging with an already listed company, averting the need for an IPO. Reverse mergers have lower costs and can be completed faster than with IPOs generally.

However, they also have more significant perceived regulatory risks and sometimes negative stigma than initial public offerings. Examples of reverse merger companies with initial public offerings include Manchester United and Burger King. The optimal path depends on each company's specific situation and goals. Companies should evaluate costs, speed, capital needs, and control when weighing alternatives to a traditional IPO.

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