Page 28 - Initial Public Offering - An Introduction to IPO on Wall Street

2.2.7 Key Takeaways

In addition to the market for the shares of a business, there are many other variables that decide
an IPO valuation, such as similar stocks in the market, growth potential, and the company's
background.

Often a company's actual results can be distorted by its marketing strategy. This makes it
crucial for early investors to study a business’s financial and be mindful of the consequences
of investing in a firm which has no proven trading history.

An aspect of the IPO launch process is that businesses are expected to generate cash flow
statements, income statements, and public balance sheets.

One drawback of buying shares in IPOs is that businesses generally don't have a strong tradition
of reporting their financials, and they don't have a proven trading history. As such, it can be
difficult to predict those using traditional methods.

2.3 The Challenges with IPOs in the Past

A few decades ago, the process of getting listed on the stock exchange was very complicated
and time consuming. There were a lot of legal forms, undertakings and declarations that were
required from a business looking to get incorporated.

The only enterprises allowed into the club were successful businesses with a record of top
performance. The others were government backed or institutionally funded organizations. New
entrepreneurs with visionary ideas had to jump through hoops to get registered to raise money.

This turned a lot of budding entrepreneurs and creative businesses away from the stock
exchange. New entrepreneurs sought to raise finances through other means, such as bank loans
or private equity investment. Going for an IPO was too big of a headache and most new
businesses had to try their luck elsewhere.

Even today, many companies raise the starting capital by taking out from their own personal
banking accounts or by acquiring loans offered to small businesses. An increasing number of
businesses also get initial funding from venture capitalists private investors. Some use all of
these sources to raise the desired capital. However, there often comes a point where a business
required must more money than it can raise through an established financial institution.

The solution is to go directly to the public and give them a way to invest in the business without
middlemen. That is where the IPO comes in. An IPO is the mechanism through which a
business first offers stock shares to new investors and thus goes public. The process is quite
lengthy with a lot of legal requirements that must be fulfilled.

Twenty years ago, the stock market regulators had strict conditions for new business IPOs.
Businesses had to prove that they had a record of successful operations to get registered at the
Wall Street. This created two kinds of problems for investors and business organizations.

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