We often see that as companies get to a certain size questions start to be asked about whether they are about to have an Initial Public Offering (IPO). They begin to increase their revenues and value to a stage where it makes sense to sell shares in the company to the public rather than seeking private investment.
The big question is, why do private companies want to do this?
There are three key elements to this:
Access to Capital
The primary reason for an IPO is that it allows companies to free up capital which can then be reinvested in the company. This is done without needing to go through complex and often expensive funding rounds.
Another reason is that the founders of the company can sell their shares of the company without actively needing to sell the entire organization, which is another costly and difficult process. It is common to see early investors in a company being the first to cash out in an IPO situation in order to invest in other companies or found new projects.
One of the biggest draws of an IPO is that it naturally brings a public spotlight onto a company. Markets want to know about new companies that have the potential for considerable growth and therefore the media is always looking at who is making an initial public offering.
This has considerable benefits for the company as it creates excitement around their products or services, which may then see a spike due to increased coverage. It also means that other companies are more willing to partner with them, creating new products and services as a consequence.
Through selling shares in the company rather than looking for private investors it also means that the company can stay in control of the people who have made it successful in the first place. When a private investor puts money into a company, it is almost always accompanied by taking ownership of a certain percentage of it. Should this percentage of accumulated investors become larger than the stake held by the founders, then this puts the company in a precarious position.
An IPO avoids this and can instead give flexibility of ownership and equity within it can also be offered to senior members of the company rather than direct salary. Equally shares can be bought or sold to balance between company control and working capital.