Why do companies go public?

For many entrepreneurs, the ultimate business milestone is seeing their company’s ticker symbol scroll across the electronic banner of the New York Stock Exchange. The Initial Public Offering (IPO)—or “going public”—is the transition of a company from being privately held to being owned by the general public.

But why would a founder, who has spent years building a business from a garage startup to a multi-million dollar enterprise, want to sell pieces of their “baby” to strangers? Is it just about the money, or is there a deeper strategic game at play? In this comprehensive guide, we will break down the mechanics of the IPO, the motivations behind it, and the significant changes a company undergoes when it opens its doors to the world.

Defining the IPO: What It Means to “Open Capital”

Before diving into the “why,” we must understand the “what.” In a private company, ownership is usually held by a small group: the founders, their friends and family, and perhaps a few venture capital firms. These shares are not traded on a public exchange; you cannot simply open an app and buy them.

When a company opens its capital, it creates new shares (or sells existing ones) and offers them to the public for the first time. This turns the company into a Publicly Traded Corporation. From that moment on, anyone—from a college student with $50 to a massive pension fund—can become a part-owner of the business.

The Primary Driver: Raising Massive Amounts of Capital

The most obvious and frequent reason for an IPO is money. While a private company can raise money from banks or private equity firms, there is a limit to how much capital they can access.

Funding Rapid Expansion

Scaling a business globally is expensive. Whether it’s building massive data centers, launching a fleet of satellites, or opening five hundred new retail locations, the costs can run into the billions. By going public, a company can raise a “war chest” of cash in a single day without the burden of interest payments that come with a bank loan.

Research and Development (R&D)

In sectors like biotechnology or aerospace, companies often spend years in “pre-revenue” stages. They need hundreds of millions of dollars to fund clinical trials or engineering prototypes. An IPO provides the “fuel” needed to innovate before a product even hits the shelf.

Providing Liquidity for Founders and Early Investors

Building a company is often a “paper-wealth” game for years. A founder might be worth $100 million on paper based on the company’s valuation, but they might still be living on a modest salary because all their wealth is tied up in company shares that cannot be easily sold.

The “Exit” for Venture Capitalists

Venture capital (VC) firms invest in startups with the specific goal of getting a high return within 7 to 10 years. They need an “exit” to give money back to their own investors. An IPO is the most prestigious exit possible. It allows early investors to sell their shares on the open market and turn their “paper gains” into actual cash.

Reward for Early Employees

Many startups attract top talent by offering Stock Options instead of high salaries. These employees work for years hoping that the company will go public. Once the IPO happens and the “lock-up period” (usually 180 days) expires, these employees can sell their shares, often resulting in life-changing wealth.

Enhancing Brand Prestige and Public Awareness

There is a psychological shift that happens when a company goes public. It is no longer just a “startup”; it is a “public company.” This carries a level of perceived stability and success that can be a powerful marketing tool.

Increased Credibility with Customers and Partners

Large enterprise clients or government agencies often feel more comfortable signing long-term contracts with public companies. Why? Because public companies are subject to rigorous audits and must disclose their financial health every quarter. This transparency creates a “trust factor” that private companies often lack.

Free Media Exposure

The day of an IPO is a massive PR event. The “ringing of the bell” is covered by major news outlets like CNBC, Bloomberg, and the Wall Street Journal. For many companies, the IPO serves as a global “coming out party” that introduces their brand to millions of potential customers who had never heard of them before.

Using Stock as a “Currency” for Future Acquisitions

Growth doesn’t always happen internally. Many of the world’s most successful companies grow by buying other companies (M&A – Mergers and Acquisitions).

“Stock-for-Stock” Deals

When a public company wants to buy a smaller competitor, they don’t always have to use cash. They can use their own publicly traded shares as a “currency.” If a company’s stock is performing well and has a high valuation, it can essentially “print money” by issuing new shares to pay for the acquisition. For the owner of the smaller company, receiving shares in a growing public corporation is often more attractive than a one-time cash payment.

Attracting and Retaining Top Talent

In the competitive world of business, the best engineers, designers, and executives are in high demand. Public companies have a distinct advantage in recruitment.

Transparent Compensation

It is much easier to recruit a high-level executive from a competitor if you can offer them $\$2$ million in Restricted Stock Units (RSUs) that have a clear, daily market value. In a private company, the value of stock is speculative. In a public company, the employee knows exactly what their compensation is worth by looking at the ticker symbol on their phone.

The Strategic Trade-Off: What Companies Lose When They Go Public

While the benefits are immense, the decision to go public is a “double-edged sword.” There is a reason many massive companies (like SpaceX or Cargill) choose to stay private.

1. The Cost of Transparency

Once you are public, your secrets are gone. Every quarter, you must file an 10-Q report with the SEC. This includes your revenue, your profit margins, your debt levels, and even a list of “risk factors” that could hurt your business. Your competitors can read these reports to understand exactly where you are vulnerable.

2. Short-Termism vs. Long-Term Vision

Public companies are judged every 90 days. If a CEO wants to invest in a project that will take five years to pay off, but will hurt profits for the next two quarters, the stock price will likely drop. This “pressure from Wall Street” often forces CEOs to focus on short-term results at the expense of long-term innovation.

3. Regulatory and Legal Burdens

Complying with the Sarbanes-Oxley Act (SOX) and other regulations is incredibly expensive. A public company must hire armies of auditors, lawyers, and compliance officers. Additionally, public companies are much more susceptible to shareholder lawsuits if the stock price drops significantly.

The IPO Ecosystem: Who Are the Players?

The journey to the stock market is not a solo mission. A company must navigate a complex network of professionals.

• Investment Banks (Underwriters): These are the firms (like Goldman Sachs or Morgan Stanley) that handle the IPO. They help set the price, handle the paperwork, and “pitch” the stock to big institutional investors.

• The SEC (Securities and Exchange Commission): The government watchdog. They review the company’s “S-1 Filing” to ensure everything is legal and that investors aren’t being misled.

• Institutional Investors: The “Big Fish.” Before the public gets a chance to buy, pension funds and mutual funds often buy large chunks of the IPO shares at the initial price.

Alternatives to the Traditional IPO: SPACs and Direct Listings

In recent years, companies have found new ways to reach the public market without the traditional “Roadshow.”

1. Direct Listings

Companies like Spotify and Slack chose a “Direct Listing.” They didn’t issue new shares to raise money; they simply allowed their existing private shareholders to start selling their shares on the exchange. This avoids the high fees charged by investment banks.

2. SPACs (Special Purpose Acquisition Companies)

Also known as “Blank Check Companies.” A SPAC is a shell company that is already public and has a pile of cash. It “merges” with a private company, effectively taking it public through the back door. This was very popular in 2020 and 2021 but has faced increased scrutiny recently.

How Retail Investors Should View a New IPO

As an individual investor, it is tempting to want to buy a company the moment it goes public. However, history shows that IPOs can be incredibly volatile.

The IPO “Pop”: Often, a stock will jump 30% or 50% on its first day of trading because of the hype. Many retail investors buy at this peak, only to see the stock drop over the following months as the “hype” fades and the reality of quarterly earnings sets in.

Successful investors often wait for a few quarters of public performance before buying, ensuring the company can handle the pressure of the public markets.

A Milestone of Maturity

Companies open their capital because they have reached a point where their ambitions are larger than their bank accounts. An IPO is not the “finish line”—it is the start of a new, more disciplined chapter in a company’s life.

By going public, a business gains the capital to change the world, the prestige to attract the best minds, and a currency to acquire competitors. But in exchange, they must give up their privacy and answer to thousands of “bosses” (the shareholders). For the companies that succeed, the trade-off is well worth it, as it allows them to transition from a private success story to a global powerhouse.