Eli5: How does a private owned company benefit itself financially by going public?
In: Economics
Well, for one, the firm gets *a ton* of money to finance operations/expansion/whatever. That’s really the primary goal. For the private owners, it’s often a great opportunity to sell their stake and cash out. Otherwise, their stake is often worth a lot more because, well, now there’s demand for it from investors.
If you get a loan, you have to pay it back with interest. Sometimes what a company wants to do is so risky a bank doesn’t really want to take the risk.
Going public means the shareholders *pay you money* and it’s not a loan. But you are selling *ownership* of your company to a degree. They hope to make their money back because they think your plan is going to pay off and they’re going to get dividends or a higher share price or some other benefit from having paid in. And if it doesn’t pay off, they can often have the power to replace leadership with people who might do a better job to try and recoup their investment.
So whether it “benefits” a company is subjective. It often means the company gets to expand in ways that wouldn’t be possible with normal means of funding. But it can also mean the company ends up having to make decisions based on shareholder whims that aren’t compatible with its original goals.
Think of it kind of like if you got 10 people to buy you a cool media room with a giant projector and a really good gaming computer and a setup so you could be a streamer. But in return, they get to pick the games you play and when you play them, and if you don’t do what they say they take the room away and give it to someone else.
Going public is fundamtaly inviting other people to invest in you company. That is often a good way to get money to expand the companies operation and gow even larger. Other way to ways money like borrowing money might not be available to you because banks might not belive that you could pay back the money.
For companies that in part is founded by venture capitalist is can be a way to exit from the company and get money back. hopefully a lot more then you invested. It is not that different from selling the company to another company, it is selling the company lost of people, companies, etc
[https://www.investopedia.com/ask/answers/advantages-disadvantages-company-going-public/](https://www.investopedia.com/ask/answers/advantages-disadvantages-company-going-public/)
You are selling shares in your company. Your company gets the cash proceeds of that sale on its balance sheet. That capital can then be used to invest in the company (expanding, buying stuff, IP, or other companies), making it more profitable & valuable in the years that follow.
Because you’re selling part of the company in exchange for cash.
So say you start a company, that’s called Microsoft, you own 100% of the company you decide to sell off 50% of it to investors for a billion dollars. You now have a billion dollars however half your profits now have to go to the investors.
The main reasons company go public are:
– Generate funds to invest in growth/expansion, especially if not yet profitable.
– Allow outside investors to realize their gains. A VC firm wants to pull their money out after a period of time so that they can invest in the next thing.
– Allows founders and other employees to make their wealth liquid. They want to turn private share value into Ferraris and SF lofts.
Uber made money for the first time in its 15 yrs of existence in 2023.
The founders have been billionaires for a long time — and cashed out many hundreds of millions in the interim. Many of the employees have also made a ton of money thru the stock.
It’s often a way to monetize in industries where the stock valuations are much higher than earnings would normally justify.
Imagine you have a lemonade stand with your friends. You make really good lemonade, but you want to make even more and sell it to more people. So, you decide to let other people invest in your lemonade stand by giving them little pieces of it called shares. When people buy these shares, you get money that you can use to buy more lemons, cups, and maybe even a bigger stand!
When your lemonade stand becomes really popular, your friends who helped you make it might want to sell some of their shares to get money for themselves. Now, because your stand is so famous, more and more people want to buy shares in it, which makes the price of your shares go up!
Being a big, famous lemonade stand also means other companies might want to team up with you or even buy your stand. If you have shares that anyone can buy, you can use them to do these cool things, like joining forces with other lemonade stands or buying more stuff to make your lemonade even better.
And because your lemonade stand is doing so well and lots of people are buying your lemonade, everyone knows how much your stand is worth. This makes your stand look really good to other people who might want to invest in it or work there. So, going public means your lemonade stand can grow even bigger and become even more famous!
Thankyou all for the answers🙏
IPO is not a charity event, the company gets a lot of money for it and often the previous owners cash out, in effect selling the company on the bourse. That’s a big reason why IPOs are so risky, in many cases it’s the payday for the pre-IPO owners and now making the company profitable is someone else’s problem.
Now of course, the securities commission is checking that companies going public aren’t just out to milk the new investors for all they are worth and are not planning to leave them holding the bag in a pump and dump scheme. But there is really only so much you can tell about the company by looking at it’s financials. How is it really functioning inside, what are the people involved doing beyond the finances? Accounting doesn’t show that.
If the previous owners personal contribution is what is making the company valuable and they wash their hands, then what remains is a worthless paper shell. Maybe all the contracts and customers the company has, it has through the owners personal connections and sales work, a common situation. Of course, when that owners cashes out and leaves, the customers go with him and maybe he takes bunch of key employees with him too to the next venture.
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