What is an IPO? How They Work and Should You Invest In One

Summary: You’ve probably heard the term but might not know what it means. What is an IPO? We’ll explain how they work and whether you should invest in one.<br> There have been so big IPOs in the last decade. Some killed it, and some landed with a thud. We’ll explain what an IPO is and whether or not you should invest in one.<br> What is an IPO?<br> IPO stands for initial public offering and sometimes called “going public”. It’s the first time a company sells stock to the public. Before an IPO, a company is private with a few shareholders, typically the founders and sometimes professional investors.<br> Before an IPO, the general public has no way to buy stock in a company apart from asking the owners to sell to you, but they don’t have to do so. Once a company IPOs, any investor can buy stock in it.<br> Why Go Public?<br> An IPO often serves as a way for companies to raise capital for funding current operations and new business opportunities. The typical IPO raises <a href="https://investorplace.com/ipm_ipo_pb/4-reasons-companies-go-public/">$100-$150 million. </a>When the company raises money through the sale of stock, they have better financing options.<br> It’s less expensive for a public company to borrow money than a private one because of the public disclosures and accounting oversight that are required for an IPO.<br> An IPO is basically a regulated cash grab for founders and early investors, giving them to cash out or get a nice lump sum. The promise of an IPO can also be a way for a company to attract the talent they can’t afford to lure with salary alone.<br> When the company is private, the founders, private investors, and employees have shares but the shares don’t have much value since they aren’t yet publicly traded.<br> After the IPO, the value of those shares can skyrocket, and anyone who has a lot of them can make themselves very rich when they sell them.<br> Being a publicly traded company also shows that a company has been able to meet the ponderous federal regulations required to be publicly traded and that gives a sense of stability which can attract more investors.<br> When to Pull the Trigger<br> There are some things to consider before deciding if the <a href="https://www.nyse.com/article/right-time-to-ipo">time is right</a> to IPO;<br> <br> * You can forecast future financial performance. No one can predict the future exactly, but inaccurate revenue and cost projections can negatively impact valuation and the ability to raise debt or equity capital in the future.<br> * The right team is in place to guide the company through its next phase.<br> * Your company is audit-ready.<br> * The valuation expectations are realistic. Not every company is an <a href="https://mashable.com/2014/09/19/alibaba-ipo-day/#wOSI2TjG6iqt">Alibaba. </a><br> * There is a good reason for doing so.<br> * The company has a strategy to grow the business and give potential investors the returns they expect.<br> <br> Even when the time seems right, not all companies are <a href="https://www.forbes.com/sites/samanthasharf/2014/12/24/is-the-ipo-outmoded-why-venture-backed-companies-are-waiting-longer-to-go-public/#406362efac56">clamoring to go public. </a><br> Tech companies are staying private longer. Amazon went public in 1997, just two years after its first round of institutional financing, at a market capitalization of about $440 million. Compare that with on-demand ride service Uber Technologies, which remains private close to six years on and after recently raising $1.2 billion at a whopping <a href="http://www.forbes.com/sites/ryanmac/2014/12/04/uber-files-for-1-8-billion-round-and-could-be-worth-40-billion/">$40 billion valuation</a>.<br> Venture capital money is not exactly in short supply. It takes a long time to get a company in a position to IPO. SEC approval can take 6-9 months.