Eli5: How does a private owned company benefit itself financially by going public?
In: Economics
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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