I'd say that the point of "going public" is to provide liquidity to existing shareholders (e.g. founders, employees, outside investors). There are other ways to raise money, if that's all you want.
Sorry, I don't know anything about finance/business. What you say makes some sense to me, that going public lets initial investors cash out, if they so wish.
But I'm still confused, why not sell public shares from the get-go. Is it that it's easier to make your case (for investment) to a VC than it is to Joe public?
Its the bane of quarterly capitalism - once public, management focus is diverted to managing earnings and increased amount of transparency needs to be provided for the company's internal operations.
Companies would prefer to stay private (and away from the limelight) while they're still figuring out product/market fit etc
The biggest reason for not going public is because you'll get a low valuation. The public markets aren't much for venture investing.
If you don't want to dilute the hell out of existing shareholders, you'll want a high IPO price. You get that by moving the company as far forward on venture cash as you can.
If you take a look at the biotech industry, IPOing too early can result in not raising enough for your cash needs, so you offer more shares, diluting your existing stockholders.
> The public markets aren't much for venture investing.
The public markets definitely are for venture investing that was their origin and still is a main function today.
However it is not rare for founders and early investors to cash out during or shortly after an IPO, typically after a hold-back period called a lock-in.
In my opinion this is a red flag, it shows that founders and early investors would rather sell at the current price than stay in, and they typically have a bit more information (insider trading laws notwithstanding) than the general public.
The stock market is an excellent place for fools and their money to be parted, think of it as a giant casino where the house controls the games and the information available, the SEC controls some of the rules and the public is (usually) clueless.
I wouldn't say founders selling is a red flag. Often the overwhelming majority of their net worth (plus a decent chunk of their future professional earnings) is tied up in their company. At some point they need diversification far more than they need to maximize returns on company stock.
Early investors are another matter, of course. They usually have other ways of diversifying so that's not a plausible motive for sales in most cases.
If I had 10 million dollars worth of stock in my company and was otherwise pretty much poor, you'd see me selling a good 50% regardless of how confident I am in the company.
When people float companies they built and worked at for a long time with little tangible reward it is not unreasonable for them to want to take their money and actually enjoy it.
The public markets definitely are for venture investing that was their origin and still is a main function today.
I guess it all depends on what you call venture investing. I don't think that Sergey and Brin could have IPOed 6 months after founding Google - the public would have found the idea of investing absurd. So instead they went to VCs who can actually realize value in a "idea" and are willing to invest at a reasonable valuation.
Raise enough VC money and you can advance the company forward enough so that the general public see value in your company (usually revenue). At that point you can IPO and actually get a decent valuation.
Sarbanes-Oxley made it much more complicated to sell to public investors than to private ones. You pretty much have to hire staff whose only job is to ensure being compliant.
Public companies always had pretty strict reporting requirements leading to substantial overhead. If you take the public's money they have a right to be informed and to a minimum standard of corporate structure and governance.
Sarbanes-Oxley was instituted in the wake of the Enron and Worldcom (and others beside) scandals (which led to the demise of accounting giant Arthur-Andersen, which - surprisingly - survived in some form because the verdict against them from the Enron debacle was eventually overturned by the supreme court) which severely undermined the public confidence in Wall Street.
As a result the already substantial reporting requirements for public companies were ratcheted up several notches further increasing the overhead. So yes, Sarbanes-Oxley made it more expensive to be listed on the stock market and therefore to be trade publicly but the difference was always there, also before SOX.
One reason is overhead. Being a publicly traded company involves lots of legal filings and paperwork ($$$). Typically, you want to stay private for as long as you can. For example, Facebook only went public when they were legally obligated to because they had reached the limit on private shareholders. (I'm not saying that was the only reason, but it was a factor in the timing)
Going public requires a vast investment in accounting and lawyering, before you can think of how to make your shares seem like a deal. There's a whole new set of laws that suddenly apply when a company is about to go public.
Going public involves giving up a lot more control, since private investments of qualified investors are basically a freely negotiable contract, while offering shares to the public is legally standardized. For example, once public there is very little you can do against some troublemaker acquiring a significant position in your company via the open market and then causing endless trouble via legally required minority shareholder rights...
> I'd say that the point of 'going public' is to provide liquidity to existing shareholders (e.g. founders, employees, outside investors). There are other ways to raise money, if that's all you want.
Actually, the point of an IPO is to raise money, from the public markets. It's an Initial Public Offering, and the company can raise more at a later date by issuing more shares. The liquidity wouldn't exist if people didn't want those shares.
The IPO just happens to be a convenient time for current shareholders to sell their stake (as part of the offering) but even then, there are rules about how they can do that (lock-in periods, etc)
