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What is an IPO? And Why Do Companies Like Lyft & Uber go Public?

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What is an IPO? And Why Do Companies Like Lyft & Uber go Public? – Whats The Best?

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An IPO is an initial public offering – or the first time a company makes shares available to the public for purchase.

If you’re running a business, you have a couple different ways to raise money:

You can take on debt — where you borrow an amount of money and pay it back over time in installments… plus interest. This can take the form of a loan from a bank, or debt the company issues itself.

OR you can issue equity — when you do this, you’re making ownership of your company available, and in exchange for that ownership, the new shareholders pay some amount of money. You don’t have to make any interest payments, but you have to share ownership of your company.

Now companies can issue equity privately, and often this is how early stage companies raise funds, meaning that they are making a deal with investment firms or angel investors to exchange some percentage ownership of their company for some large chunk of money. If you’ve ever watched Shark Tank, you’ve seen this at play.

Raising money privately is helpful early on – the company doesn’t have to publicly disclose as much information and management doesn’t have to worry about market noise. But that shield comes at a cost – it’s a lot harder for people who hold shares in private companies to turn their shares into cash.

Because of this, eventually many large businesses will reach a point where they want to “go public” and list shares on an exchange where they can easily be traded.

If that’s the case, the company will go through an IPO.

That means the company will work with an investment bank like Goldman Sachs or JP Morgan. These banks will “underwrite” the IPO, meaning that they will determine a valuation for the company, buy the shares from the company at a set price, then distribute them and help the company file with the Securities and Exchange Commission and get listed on exchange like the New York Stock Exchange.

IPOs get a lot of buzz, but often its better to stay on the sidelines as an investor.

Because IPOs are the public’s first chance to buy into a company, there is often a lot of pent up demand to buy shares when they first become available. This leads to a lot of funky price movements, because the value is being dictated by the short-term spike in demand, not business results which actually drive stock prices over time.

Also, an important thing to remember – most of the time the company is choosing when it is going public… so they’re going to do it at a time when it is advantageous for them to do so.

Think about it, if you were going to sell a portion of a business you ran, you’d want to get the most you could for it, right? So you’d probably do it when business results looked really strong.

The same logic applies to IPOs – at their core, IPOs have a couple major players, and their incentives are all aligned:

The business – The money from the business selling shares to the investment banks goes directly to the company, giving them cash to work with, so the company wants to raise as much as it can. You’ll often hear IPOs called a “capital raising” event.

The investment bank – The investment bank has bought shares from the company and is usually selling them to big clients and high net worth individuals. The investment bank wants to make sure it can sell what it bought, and wants its valuable clients to be able to make money on the shares so that they stay happy. So they want the shares to price high and gain value short-term.
Early investors – Most private companies have early investors, venture capitalists, big investment firms, and angel investors. These folks have had their money tied up in the private company for a while and often are ready to sell their stake and make a return on their investment. For them, IPOs are an “exit opportunity”
Founders and employees of the company — Founders and early employees of companies that go public often have a lot of their personal wealth tied up into the business through shares they’ve accumulated. For these folks, IPOs are a “liquidity event” , meaning they give people the chance to convert stock into cash.

All of these people generally want to maximize the value of the business around the time it IPOs – it means the company raises as much money as it can, and it means people “exiting” their investments are getting top dollar for the shares they’re selling.

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27 Comments
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27 Comments

  1. BIHM III
    July 18, 2021 at 8:37 am

    Where can I find the companies that are looking to go public?

  2. Omega Destroyer
    July 18, 2021 at 8:37 am

    Thanks for not wasting time and getting straight to the point

  3. Anand Kumar
    July 18, 2021 at 8:37 am

    Good news: all very well explained. Bad news: markets move way more illogical than the video and sometimes common sense implies.

  4. sunny sunny
    July 18, 2021 at 8:37 am

    Hi I am a deliveroo rider and deliveroo is going public so my question is that will this impact on my job ? Or in other words will it effect my job ? Can you explain a little bit please
    Thanks

  5. Lady Dje
    July 18, 2021 at 8:37 am

    Thank you very much, this opened my eyes!

  6. Angel Z.
    July 18, 2021 at 8:37 am

    Great explanation man! Clear and to the point. Thank you.

  7. Nana
    July 18, 2021 at 8:37 am

    Awesome job guy!!!

  8. Usman Abbasi
    July 18, 2021 at 8:37 am

    Great explanation!

  9. Humble Beginning
    July 18, 2021 at 8:37 am

    Good info bro

  10. jason bowman
    July 18, 2021 at 8:37 am

    By proxy. WeWork sent me here.

  11. Annaleisha Mae
    July 18, 2021 at 8:37 am

    Concise. Thanks.

  12. Guybrush Threepwood
    July 18, 2021 at 8:37 am

    Palantir just got offered as an IPO it's around $9, based on this discussion seems like I would be smarter to wait a while and see what happens with it vs buy now?

  13. lokesh surage
    July 18, 2021 at 8:37 am

    Vdo is good, but background music is working as noise, not able to hear the voice at some places

  14. Dastan k
    July 18, 2021 at 8:37 am

    Thank you, there is no better way to break down the details about IPO. Cheers

  15. Monjur Karim
    July 18, 2021 at 8:37 am

    Hello, thanks for the nice update on ipo. How do I know about upcoming ipo launch in US exchange and also some analysis about upcoming ipo.

  16. ii
    July 18, 2021 at 8:37 am

    So should a startup investor sell his shares when there is a IPO

  17. Jason Scalzo
    July 18, 2021 at 8:37 am

    Great video! I thought it would be hard to understand but it was explained really well

  18. L Downstairs
    July 18, 2021 at 8:37 am

    Really appreciated this video, thank you! my only downside was when I try looking into your eyes (emulating in-person interaction), I was seing you read of the prompter.. wasn't a big deal but had me annoyed.

  19. James Robert Archbald
    July 18, 2021 at 8:37 am

    thanks smitch

  20. ZRabbit
    July 18, 2021 at 8:37 am

    I would buy Starlink IPO any time of the day

  21. Jessie Mcbride
    July 18, 2021 at 8:37 am

    Baby that was cute

  22. Warrior 4Him2.0
    July 18, 2021 at 8:37 am

    Good advice

  23. Ramon Aviles Lizardo
    July 18, 2021 at 8:37 am

    Uber and Lyft screwed themselves by going public. Now all drivers are quitting

  24. staj
    July 18, 2021 at 8:37 am

    Precise, concise and super comprehensible. Keep it up!

  25. Kartik Work
    July 18, 2021 at 8:37 am

    Great video

  26. Stefan Grabe
    July 18, 2021 at 8:37 am

    I see no point in selling shares of your company if you can get a loan from a bank instead. Can you shed some light on it, please?

  27. Daniel
    July 18, 2021 at 8:37 am

    I thought this was Matt Lieberman from sourcefed 😂😂