IPO (Initial Public Offering) | Startup Basics

An Initial Public Offering (IPO) is a transformative process where a private company issues stocks to the public for the first time.

This pivotal event allows the company to raise capital from a broad base of investors. IPO also means transitioning from a private entity to a publicly traded company listed on a stock exchange.

Additionally, an IPO provides liquidity to the company’s founders, employees, and early investors, enabling them to sell their shares and realize a return on their investment.

This liquidity can be a significant incentive for early stakeholders who have supported the company from its inception.

Why Do Companies Go Public?

• Raise capital – Funds from an IPO can be used for expansion, research, and acquisitions.
• Increase credibility – A public listing boosts brand reputation and transparency.
• Provide liquidity – Early investors and employees can cash out their shares.
• Attract top talent – Stock options make the company more attractive to employees.

📌 IPO definition: Initial Public Offering is a company's first step to equity sharing on a large scale. On avarage startups go through such round only once.

Purpose of an IPO

Going public is all about new avenues for growth and expansion while leveraging gained capital to fuel its ambitions.

The primary purpose of an IPO is to raise capital - just like the previous funding rounds.

Money gathered during this stage can be used to fund various business activities such as expansion, research and development, and acquisitions.

3 Main Types of Initial Public Offerings

• Traditional IPO – Uses investment banks to underwrite & market shares (e.g., Facebook, Uber). In a Traditional IPO, the offering price is determined by the investment banks based on various factors such as investor interest and market conditions.
• Direct Listing (DPO) – No underwriters, allows early investors to sell shares directly (e.g., Spotify, Coinbase).
• SPAC (Special Purpose Acquisition Company) – A “blank-check” company takes a startup public via merger (e.g., Virgin Galactic, DraftKings).

Interested in a scenario in which company valuation drops instead of growing?

Click here to read our article on Down Round >

How Many Series of Funding from Venture Capital Firms Before IPO?

The typical number of seed rounds a company goes through before completing an initial public offering (IPO) is 3.

However, no set number of rounds must be used to raise funds.

Many companies will complete an initial public offering (IPO) after their Series C funding round. However, other companies may need to continue using fundraising rounds to expand or grow.

• Funding size: Varies (Can be $500M – $1B+),
• Investors: Public market investors (Retail & Institutional),
• Shares: Equity becomes an asset publicly traded on the stock exchange,
• Goal: Companies go public to gain massive capital for future expansion.
• Key Factor: Transition from a private to a publicly traded company.

IPOs come with many new challenges.

Going public often implies increased regulatory scrutiny, investor pressure, and higher costs. Many startups weigh these pros and cons before deciding to go public.

The company's management team plays a crucial role in the success of an IPO, as their experience and leadership can instill confidence in potential investors.

Going public is a complex process that takes 6–12 months.

This stage often involves regulatory approvals, financial audits, and investor roadshows.

Step-by-Step IPO Process:

• Appoint an investment bank (Underwriter) – Investment firms like Goldman Sachs, Morgan Stanley, or JPMorgan help manage the IPO.
• Prepare financial statements & SEC filings – Must comply with regulations (e.g., SEC’s S-1 Registration Statement in the U.S. overseen by the Securities and Exchange Commission).
• Roadshow & investor pitching – The company presents to institutional investors to gauge interest.
• Determine IPO price & shares – Based on demand, analysts set the final IPO price per share.
• Stock market listing & trading begins – The company’s shares start trading publicly under a stock ticker (e.g., $TSLA for Tesla).
• Post-IPO compliance & reporting – The company must file quarterly reports and follow stock market regulations.

📌 Example: Airbnb’s 2020 IPO on Nasdaq ($ABNB) was priced at $68 per share but opened at $146 per share, doubling on the first day!

The IPO process involves substantial costs and fees.

These include investment banking fees, legal fees, accounting fees, and listing fees.

All of those can collectively range from 5% to 15% of the total amount raised.

That is why investment banks play a crucial role in underwriting and managing the IPO. After all, legal and accounting professionals ensure compliance with regulatory requirements.

Listing fees are paid to the stock exchange where the company’s shares will be traded.

These costs reflect the complexity and scale of the IPO process, underscoring the importance of meticulous planning and execution.

How Much Funding Can You Raise with an IPO?

The amount of funding a company can raise through an IPO is influenced by several key factors, including:

• the company’s financial performance,
• growth prospects,
• industry trends,
• market conditions,
• the demand for its shares, etc.

A company with robust financial health, a proven business model, and a clear growth strategy is more likely to attract substantial investment.

High-growth industries, such as technology and biotechnology, often see higher capital inflows compared to slower-growth sectors.

The company’s management team also plays a critical role in attracting potential investors.

A strong, experienced leadership team can instill confidence in the company’s prospects. Additionally, the overall health of the economy and prevailing market conditions can significantly impact the success of an IPO.

The type of investors involved can also affect the amount of funding raised.

Venture capital firms and angel investors may participate in private funding rounds, while institutional investors, such as pension funds and mutual funds, are more likely to invest during the IPO.

The diverse investor base can provide a substantial pool of capital, helping the company achieve its funding goals.

In summary, the amount of funding raised through an IPO depends on a combination of the company’s financial performance, growth prospects, market conditions, and the types of investors involved.

By understanding and optimizing these factors, companies can maximize their capital-raising potential during an IPO.

Post-IPO Responsibilities:

• Quarterly earnings reports (SEC Filings: 10-Q, 10-K),
• Shareholder meetings & board governance,
• Managing stock volatility & public perception,
• Company insiders – Must adhere to lock-up agreements and other regulations to prevent market manipulation.

📌 Example: Spotify (2018) used a Direct Listing to avoid underwriter fees and let existing shareholders sell stock directly.

Interested in a bird's eye point of view?

Click here to see our roadmap article: Startup Funding Rounds >