Ever wondered how a company like Facebook got so big, or why Elon is worth $200 Billion? It’s a question most people don't think too much about, but there's a key milestone in a business's journey to reach that level of prestige. This milestone is called an Initial Public Offering (IPO).
As the name suggests, an IPO is when a company decides to present itself to the general public and offer its shares for sale. It's a way to raise capital by selling ownership stakes to investors, while also creating a buzz because now, the public has the potential to be financially involved in the company.
The most crucial part of preparing for an IPO is figuring out the price of the shares. This price must be enticing enough to attract buyers on the first day, but also reflect the true value of the company to assert its dominance. Thankfully, companies work with investment banks to nail down this number! Investment banks, or Underwriters as called in finance lingo, assess the risk, determine the price, and buy the securities from the issuer and sell them to the public, ensuring the offering's success.
So, you’ve done the monstrous task of launching an IPO, presenting your “baby” to the world. Now you can sit back and rake in the dollar bills, right? To the moon!? Well, it's not that easy.
Taking a company public means there's no way of knowing how well it will perform in the market. Unfortunately, only about 34% of companies that go public end up being profitable and successful (Post-ipo profitability U.S. 2005-2022 2023). Popular organizations like Etsy, Uber, and SmileDirectClub all struggled after going public. This idea of "failing" often relates to the expectations set before the IPO. Whether the share price ends up higher or lower than the initial valuation can determine the perceived success of an IPO.
The IPO fallacy is a popular misconception that initial public offerings are always profitable investments. In reality, IPOs can be highly volatile and often underperform compared to established stocks.
Take Facebook, for example. On May 18, 2012, Facebook made history with its IPO, which was the largest technology IPO in U.S. history at that time. The company offered 421,233,615 shares at $38 per share, raising $16 billion. Despite the immense hype, the stock price dropped right at the opening, and over the next few months, share prices fell by more than 40%. By August 2012, total losses had reached $50 billion.
The moral of the story? Always do your research and never jump the wave! Take some time and connect with entrepreneurs and investors who make these judgment calls for a living. Lucky for you, the entrepreneurship club can help you make these connections. Become a member today and turn your dreams into reality.
Citations:
Post-ipo profitability U.S. 2005-2022 (2023) Statista. Available at: https://www.statista.com/statistics/914724/profitable-companies-after-ipo-usa/