From Startup to Stardom: What is an IPO?

1 minutes reading time
Published 26 Jun 2023
Reviewed by: Peter Westberg
Updated 8 Feb 2024

An Initial Public Offering (IPO) is a momentous event in the life of a company. From early-stage startups to mature businesses, the decision to go public through an IPO is a game-changer. But what does it really mean, and why is it crucial for investors to understand the mechanics of IPOs? Below, we will break down the concept of IPOs, explore how they work, and delve into why investors should be paying attention.

Key Insights

  • IPOs Defined: An IPO is when a private company offers shares to the public to raise capital, transitioning from a private to a public entity.

  • IPO Process Steps: The IPO process includes planning, hiring underwriters, filing a prospectus, pricing shares, marketing the offering, and then going public.

  • Investor Opportunity and Risk: IPOs offer investors early entry into a company’s growth journey but carry inherent risks, necessitating careful evaluation.

  • Staying Informed for Investment Decisions: For investors seeking diversity in their portfolios, tracking IPOs and related market events can provide valuable insights into potential investment opportunities.

What is an IPO and How Does it Work?

An Initial Public Offering, or IPO, is the process by which a private company offers its shares to the public for the first time. This transition from a private to a public entity allows the company to raise capital from a wider pool of investors. Before an IPO, the company's shares are considered private stocks, owned by a limited group of investors such as founders, early employees, and venture capitalists. Through the IPO, the company issues new shares or sells existing ones to the general public.

Here’s a simplified explanation of how the process works:

  • Planning and Hiring: The company decides to go public and hires investment banks to underwrite the IPO. A lead underwriter is chosen to steer the IPO process.

  • Filing the Prospectus: The company submits a prospectus to the securities regulatory authority. The prospectus is a detailed document that contains information about the company's business model, financial health, and the risks and prospects of investing in its shares. It's important for potential investors to thoroughly read and understand the prospectus before investing.

  • Pricing the Shares: The underwriters and the company decide on the number of shares to be issued and at what price.

  • Marketing the Offering: The underwriters market the offering to institutional and retail investors to generate interest.

  • Going Public: The shares are made available to the public, and trading begins on the stock exchange.

What is an IPO in Simple Terms?

In simple terms, an IPO is like a grand opening of a company to the public. Imagine a members-only club deciding to open its doors to the general public. Before the IPO, the company is like that exclusive club, with a small group of members or investors. Through the IPO, it invites the public to become shareholders and participate in its journey.

Notable IPOs Since 2000

A classic example of an IPO is the Facebook (now Meta) IPO in 2012. Facebook, which started in a dorm room, grew into a social media giant. When it decided to go public, it raised $16 billion through its IPO, making it one of the biggest IPOs in tech history. This allowed Facebook to raise capital for expansion, and also provided an exit for early investors.

In 2023, alongside other notable IPOs, ARM Holdings and Birkenstock made significant entrances into the public market, each offering a unique context and potential impact in their respective industries.

ARM Holdings IPO

  • Filing and Listing: ARM Holdings, a British semiconductor and software design company, filed for an IPO on August 21, 2023, and officially went public on September 14, listed on the Nasdaq.

  • Company Background and Acquisition: ARM was founded in 1990 and previously traded on the London Stock Exchange and Nasdaq as an American depositary receipt. In 2016, it was acquired by SoftBank Group for $32 billion. Following a failed acquisition attempt by Nvidia, SoftBank incurred significant losses, leading to a pitch for an IPO by SoftBank Group CEO Masayoshi Son​​.

  • Market Valuation and Challenges: Initially delayed in November 2022 due to market turmoil, ARM aimed for a 2023 IPO with a valuation between $30 to $70 billion. It sought to raise $8 billion, with SoftBank targeting a $52 billion valuation. However, internal disputes, specifically with Arm China CEO Allen Wu, posed challenges to the IPO process​​.

  • Trading Performance: ARM’s shares began trading at $51 per share, reaching $61 on the first day but later falling to around $52.24, a modest increase from the IPO price​​.

Birkenstock IPO

  • IPO Pricing and Fundraising: Birkenstock priced its U.S. IPO at $46 per share, in the middle of its indicated price range, raising about $1.48 billion and valuing the company at approximately $9.3 billion​​.

  • Company Heritage and Brand Positioning: Founded in 1774 in Germany, Birkenstock has a long history as a footwear maker. The brand has recently sought to reposition itself as a fashionable item, endorsed by celebrities and featuring in mainstream media. In 2021, L Catterton, backed by LVMH, acquired a majority stake in Birkenstock​​.

  • Trading and Market Context: Birkenstock’s IPO was part of a wave of recent listings, indicating a potential recovery in equity capital markets. The company’s shares started trading on the New York Stock Exchange under the ticker “BIRK”​​​​.

Both ARM and Birkenstock’s IPOs reflect the diverse landscape of the 2023 IPO market, with each company bringing its unique history, market challenges, and investor expectations. If you’re interested in digging deeper, enjoy our long-form articles featuring ARM’s Smartphone monopoly and Birkenstock’s 250-year shoemaking heritage.

Who Gets Money from an IPO?

The money raised from an IPO can go to the company, which can use it for various purposes such as expanding the business, paying off debt, or funding research and development. Sometimes, existing shareholders sell their shares through the IPO to cash out, in which case the money goes to them and not the company.

Why Should Investors Care?

IPOs can be attractive investment opportunities. They allow investors to buy shares of a company at the ground floor. If the company performs well, early investors could reap significant profits. However, IPOs also come with risks, and it’s important to carefully read the prospectus and understand the company’s business model and financials before investing.

For investors looking to diversify their portfolios and potentially get in on the ground floor of the next big success story, keeping an eye on IPOs is a strategy worth considering.

In Conclusion

Understanding what is an IPO and how it works is essential for investors seeking to diversify their portfolios and capitalize on new opportunities. While IPOs offer the potential for high returns, they also carry risks. As with any investment, due diligence is key.

Keep Track of Upcoming IPOs

Ensures you stay updated when your company—or any other you wish to track or analyze such as an upcoming IPO—is mentioned by customers, suppliers, competitors, or any other participant in the public markets. Quartr cover events such as earnings calls, capital markets days, and investor conferences from companies of all sizes worldwide.