It’s a buzzword we hear constantly—and one that’s sure to generate tons of headlines. Alibaba had the largest in history (before its billionaire founder decided he wanted to quit to be a grade school teacher.)
Lyft IPO’d recently also, beating arch rival Uber to the proverbial punch.
Other than being a buzzword and a big story, what exactly is an IPO?! Well, let’s break it down.
What is an IPO?!
In technical terms, an Initial Public Offering (IPO) is the first sale of stock issued by a company to the public. In other words, this is the moment when a private company goes “public” by offering its shares for sale to the public.
So when a company does go public, the valuation usually spikes dramatically—and the company can now use the funds from the sale of shares to feed the business. It’s a fabulous funding source for a company.
Before that, what is a company?
Prior to going public, a company is a privately-owned firm. Obviously. The company initially attracts investments or seed capital from the co-founder, friends, and families.
Business investors such as venture capitalists, private equity companies and angel investors pump in money if they are optimistic about long-term prospects and sustainability of the company.
On the flip side of things, you sometimes have companies that decide to go “private,” like Elon Musk said he wanted to do with Tesla.
Why does a company opt for an IPO?
The biggest advantage for a publicly listed company is access to capital. This capital can be used to purchase machinery, fund research and development or pay off any existing debt.
The firm will then be listed on a public exchange and provides an exit route for business investors and founders.
When Facebook went public, Mark Zuckerberg sold 30M shares worth $1.1B. An IPO is the most common way for investors and VCs to make a significant return on their investment. In fact, it’s considered the ultimate exit for founders.
How much capital do the companies get?
Let’s run down the list.
Top tech unicorns such as Uber, Slack, and Airbnb are on course to file for an IPO over the next 18 months.
The company that is looking to go public hires an investment bank to underwriting the IPO process. Investment banks can either work together or individually in this process.
What do the investment bankers do?
In other words, all the boring admin stuff. In exchange for this, they collect a nice fat fee, usually anywhere from 4-7% of gross proceeds.
Those involved hold several meetings to finalize the IPO process and determine the timing of the filing. Once this is wrapped up, they shift to performing the due diligence to ensure the company’s registration statements are accurate.
The due diligence tasks include market due diligence, legal and IP due diligence, financial and tax due diligence. At the end of this process, the companies then file for an S-1 Registration Statement.
The S-1 is usually what tips off the press and the public that a company is about to go, well, public.
And what’s the S-1?
The S-1 statement includes information about the companies’ historical financial statements, company overview, risk factors, and other critical data.
A pre-IPO analyst meeting is then held post the S-1 Registration Statement to educate analysts and bankers about the company.
A preliminary prospectus can also be drafted at this stage. The underwriting investment bank conducts pre-marketing to determine the interest of institutional investors and the price they are willing to pay per share.
Now you’re ready to go public
The price range for an IPO is set and the S-1 Registration Statement is amended with the price range. The company’s management organizes road shows and marketing activities to generate interest for the upcoming IPO.
Based on investor interest, the price range per share can be revised. The investors will apply for company shares and this application window is open for generally 2-4 days. The company shares can be oversubscribed or undersubscribed.
Once the IPO is priced, the investment banks will allocate shares to investors where the stock will now be available for trading in the secondary market.
At this point, a company is now ready to go public. Here’s how people usually look when that happens.
Congrats. You’re now an IPO expert.
CNBC: Here’s Why WeWork Wants To Go Public
News broke recently that WeWork’s going public in September. In this video, CNBC breaks down why they’re going public.
Before you watch, though, here’s some context.
WeWork’s recent S-1 filing — the paperwork you file with the SEC right before you go public — had the entire internet up in arms, including ourselves, trying to decode how the heck WeWork justifies its insane valuation.
Considering, ya know, IWG, a direct competitor, has nearly double the revenue, five times the members, is $2.5B ahead on the bottom line and…well, you can sort of see where this is going.
Despite earning an insane $47B valuation this year, it’s bleeding dough. Yes, WeWork grossed $1.8B in 2018…but it also lost $1.9B.
Be that as it may, WeWork is going public this year (via parent company “The We Company”), the latest in a string of high-profile tech IPOs in 2019.
And speaking of tech. Despite numerous “tech” mentions in the S-1, critics are claiming WeWork is little more than a real estate company.
As far as the We losses go, CFO Artie Minson told CNBC that investors need not worry about those grim financials, but instead to look at WeWork’s losses as “investments” that will lead to greater cash flow. (Which is very possible.)
And even if short-term losses eventually unearth long-term cash flows, will they be enough to justify its lofty valuation…and even loftier ambitions?
While we’re waiting for time to tell on WeWork’s future, if you’re looking to raise your startup game right now, go check out our content partner More Labs’ brand-new drink Aqua+. (Yes, the same More Labs behind this drink that broke the internet.)
Video: Compound Interest, Explained
3 Ways To Invest From Your Smartphone For Under $5
The numbers say 80% of millennials don’t invest in stocks.
Reason? Half say they don’t have money, one-third says it’s too early and another third says they don’t know how.
In addition to that, there’s demographic gap. “The average age of a financial advisor is 55,” said Douglas Boneparth, a New York City-based financial planner. “There are more financial advisors over the age of 70 than there are under 30.”
Despite these beliefs, you don’t really need much money, nor experience, to get started. (Just look at our fearless co-founder Odunayo Eweniyi and what she’s pulled off here)
Be that as it may, here are three ways to get started for $5 or less.
What: A micro-investment app (iOS and Android) with over 30 ETFs according to industry, sector and risk tolerance.
How it works: Download the app and choose your investment.
Minimum investment: $5
Cost: Fees range from $1 a month for accounts under $5,000 to 0.25% a year.
“We help people who don’t have a lot save money on a weekly basis,” CEO and co-founder Brandon Krieg said in one interview. “Stashers look like America, they look like people you meet every day: they are nurses and teachers and Uber and Lyft drivers.”
What: iOS and Android app.
How it works: Download the app and choose one of six index funds. When you buy, say a cup of coffee for $1.75, it rounds up the change to $2 and deposits the difference.
Minimum investment: $5
Cost: Just like Stash, fees range from $1 a month for accounts under $5,000 to 0.25% a year.
“We’re not trying to preach austerity to the client, because that’s a bummer,” CMO Manning Field says. “Some people will say, ‘Don’t have the cup of coffee.’ We’ll tell you to have the cup of coffee and invest along the way.”
What: A commission-free investment app (iOS and Android).
How it works: Download and start buying stocks.
Minimum investment: Whatever stock you want to buy.
And by the way, if you want to get a fast start on real estate, here’s Forbes’ list of nine REITs with yields between 8% and 10%.