While the frequency of IPOs (Initial Public Offerings) has declined in recent years, the idea of going public can still be very seductive.
To give an abridged version of a sixty-page paper available via Harvard, growth in the private equity market and improved access to capital have made it easier for private companies to stay private.
Whether you are just starting out and have aspirations to someday launch and IPO, or are already at decision time, here are a couple pros and cons to going public:
Pro: An IPO can generate a significant amount of capital.
Even if a company doesn’t make headlines – like Snap, Inc’s massive $3.9 billion IPO last year – it can still receive a helpful injection of capital by offering up their stock. This can be used to push the company to the next level by funding potential acquisitions and giving employees stock options.
Con: Going public can result in less control of the company.
Board members or owners can experience a great deal of pressure after going public. Investors looking for a quick buck can place undue strain on management, often convincing them to make short-term moves to increase shareholder profit. This can put the long-term health of the company in jeopardy; ensuring that your business plan can accommodate for shareholder pressure is imperative when it comes to going public.
Pro: IPO’s can create buzz and hype around your company.
The hype around a new IPO is some of the best free marketing a company can experience. News of an upcoming IPO can put your company’s name in the mouths of thousands, potentially boosting sales and putting you in the limelight.
Con: Launching an IPO is a long, expensive process.
Preparing an IPO can take over a year, and requires hiring investment bankers, lawyers, and accountants. By the time the IPO is ready to launch, market conditions can be drastically different, resulting in what is essentially a waste of time and resources.
Pro: Publicly traded companies can be seen as more prestigious.
Consumers tend to trust publicly traded companies more, be it because of the familiarity or because public companies are subject to more scrutiny from institutions like the SEC, and the necessary auditing they go through regularly.
Prospective employees can also be attracted to publicly traded companies, as stock options and the name recognition of a highly regarded company can help them out later.
Con: Publicly traded companies are subject to more restrictions
Public companies are audited periodically, and need to produce quarterly and annual reports for the public. The finances of the company are also available to everyone, which can potentially damage share prices. Publicly traded companies need to operate with a great deal of honesty (as all companies should) as shareholders and investors are an impatient, quick-acting bunch.
Going public with your company is a decision that requires a heck of a lot of planning and deliberation.
Like all other decisions, there are upsides and downsides to launching an IPO, and with the private equity market and businesses like FundKite, access to capital for private companies
is easier than ever.
If you someday want to go public, knowledge of how to get there and what to expect is necessary. Now get out there!