Understanding the benefits of going public is part of what students learn in a high-quality online MBA program. Graduating with an MBA sets up business leaders to succeed in starting their own companies and eventually reaping the benefits of taking it public. Some, after considering the pros and cons of an IPO initial public offering , decide to remain private. But for those who forge ahead, the decision to go public can lead to many rewards. When companies decide to go public , they usually are justified in the decision by some combination of the following.
The biggest reason for going public is the influx of cash from investors, which immediately makes a business more liquid and able to expand operations, do research and development and pay off existing debt. Another benefit of an IPO is the increased public awareness of a company. A company only has a few options to select from for raising capital like venture capital funding, availing loans, or issuing shares.
Most companies face difficulties in raising equity capital from venture capitalists as potential investors may not give a fair market value to the entrepreneurial venture.
In such instances, it is wise to seek equity investment from the public who might value the company based on its perception, thus being a more cost-effective way of raising capital.
This makes the company robust and more credible in the eyes of the investor. It also allows in attracting and retaining better talent and unlocking the doors for profitable mergers and acquisitions. While launching the IPO, a company promotes and advertises its public offering. Public companies, and those that are about to go public, have their annual and quarterly financial statements scrutinized by investors and analysts. Private companies considering going public often assess their own financial statements and take any write-offs they are allowed under Generally Accepted Accounting Principles GAAP all at once to present better income statements in the future.
For example, accounting rules require that companies write-down inventory that is unsalable or worth less than the original cost. However, there is substantial leeway in making that determination. Companies often keep inventory on their balance sheets as long as possible to ensure they are meeting asset ratios for banks and other lenders.
Once a company contemplates going public, it often makes sense to write-off the inventory sooner rather than later when it would impact shareholder profitability. Once a company contemplates going public, it has to think about how qualified its current management is and whether it is in need of some spring cleaning. To attract investors, a public company needs to have officers and managers who are experienced and have a track record of leading companies to profitability.
If there is a full-scale overhaul in the upper echelons of a company, it may be a signal that it is trying to improve its image in advance of going public. A company that springs up from scratch can often have some business units attached to it that are ancillary to its core, or main, business purpose. An example of this is an office supplies company that has a payroll processing business. The secondary business does not connect directly to the main business.
In order to market a company in an initial public offering, the prospectus is expected to show a clear business direction.
If a company is shedding its non-core operations, it may be a sign that it is getting lean and mean in preparation for a public share offering. Because of the ability of a private company to keep quiet on its intentions to go public until the formal SEC-required filings and announcements, it can be difficult to assess whether a company is heading in that direction.
However, there are always more subtle signals for those seeking them out. These signs include the company upgrading its corporate governance standards, taking big accounting write-offs, overhaulings its senior management team, and selling off non-essential business segments. It can be difficult for entrepreneurs and founders to accept this. Understandably, we often get attached to those early customers who helped us launch our businesses.
When we started Okta, we primarily sold to small- and medium-sized businesses that were moving to the cloud. More than a decade later, we now have customers that use our products in ways we couldn't envision when we started the company, from government agencies to nonprofits and large enterprise companies. Often, an IPO serves as a stamp of approval in the market. Many companies find that when they go public, new, risk-averse customers that didn't want to take a bet on a smaller, private startup are now willing to buy-in.
If we hadn't been open to our customer base shifting, we would have missed out on many business opportunities and long-term growth. An IPO is a huge achievement. It takes an incredible amount of teamwork, strategy, coordination, and execution to pull one off successfully.
Similar to any other company milestone, whether it's a major product launch or an annual customer event, it's one of the many pieces of the pie that make your company successful.
The way we managed and scaled our business after going public was equally, if not more, important than the work we did leading up to that moment. That is a lesson I could have only learned after going through the extensive IPO process myself. Be flexible, be forward-thinking, and continue to put all efforts into achieving your vision.
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