Long-term financing strategies
IPO – The end of the road?
Congratulations – your company just conducted their initial public offering. But what does it mean and what´s coming next? Contrary to many believes, the IPO is not the end of the road, but rather just the start of the long-term development and success of the company.
A company usually starts off with initial investments in form of family and friends, a pre-seed investment and maybe even a seed investment before an IPO comes into play. In preparation of the IPO the number of shares that will be emitted gets determined. Depending on the share price, this will set the amount of new capital the company generates. This will secure short to midterm financing operations and will allow the company to grow. As the capital generated by an IPO shall cover the financing operations for the next 12 months, subsequent financing alternatives are required, which can be perfectly combined with an IPO. As already stated, the IPO is just an embedded element of the fundraising strategy. Once the IPO is conducted, there are various, subsequent possibilities to raise capital. To make sure that a founder retains the largest possible ownership, it is important to not just raise as much capital as possible but rather think about several financing steps once the listing is completed. A company should try to achieve a greater part of its value increase as a listed company, instead of waiting too long to get listed. Hence, a company can list itself relatively early and then work out a financing strategy that is intended to be implemented in several stages after the listing.
As one of many financing options after an IPO, the company could carry out share issues to gain new capital. A share issue describes the situation where an already listed company sells further shares to generate new capital. During a share issue, generating new capital comes along with dilution and thus a decrease of the ownership stake. Nonetheless, dilution is dependent on the performance of the company. If a company performs well, the valuation of the company increases and consequently, in case of another share issue, the dilution of the company decreases. Thus, a share issue is a great subsequent financing alternative as the dilution can be counteracted by good performance. Moreover, it is a convenient alternative to generate new capital as the additional effort required is relatively low.
Second, right share issues can function as a new source of capital. In that case, existing shareholders are given the opportunity – not the obligation – to buy new shares in a specified period at a given, usually discounted price. As a result, the company generates new capital, and the shareholders are eligible to buy new shares at a discount. Next, a secondary listing could be the desired choice. This means, the company will not just get listed on one stock exchange but lists its same stocks on other, often foreign stock exchanges as well. The listing of stocks on another stock exchange pursues the objective to access new investors, increase transparency due to new regulations, increase liquidity and improve the public image. Furthermore, an already listed company could look for a private placement, which will give them new capital. In that case, a company carries out the selling of shares to investors, which takes place in private. The purpose is either to generate new capital or to get a strategic investor on board.
One of the advantages of an IPO is reaching a broad audience of investors and improving the public image. Thus, the search for an external investor will be much easier once an IPO is conducted. Another financing alternative is debt capital. If the financial situation of the company is stable, a positive outlook can be presented and the general macro-economic situation is solid, companies have better access to bank loans at favorable conditions. The advantages coming with an IPO, such as transparency and public image, will be useful in this scenario as well.
To summarize, an IPO is more of a starting point than the final step, and thus should be seen as such. Contrary to many beliefs it offers the company more possibilities to raise capital in the future or bring in a strategic investor, than without being listed and thus, should be considered in any long-term financing strategy. Therefore, it is advisable for a company to get listed early and achieve a greater part of its value increase as a listed company. In addition, the advantages that come with public listing can be beneficial for future financing options. Including but not restricted to, these advantages are a broad audience of investors, a valuation fix point, increased valuation, and an improvement of the company image. Now remember: an IPO is not the end of the road but will rather pave the way for a long-term financing strategy and thus long-term success.