Page 29 - Initial Public Offering - An Introduction to IPO on Wall Street

2.3.1 Problems for Investors

If a business is only allowed to get an IPO once it has been in operations for a while, it will
have passed its initial growth stage. Its revenue growth at a later IPO will be stable at best, and
in a state of decline at its worst.

Investors will not be able to get the real benefit of business growth for the company.

2.3.2 Problems for Businesses

Businesses, on the other hand, have the biggest need of funding at their initial stage of
operational set up. If they can’t run an IPO at this stage they are forced to get funds through
other means such as lending banks and financial institutions.

Once a business has already established and become stable, they would have little need left for
an IPO.

Indeed, statistics show that US companies tend to go public later in their business life cycle.
The number businesses that are taking the option to IPO has been going down.

Moreover, the number of loss-making companies that are going public has risen. Almost 80%
IPOs are carried out by companies on a downturn which means the potential for value creation
can be lower for shareholders.

2.4 Easing of IPOs

Market watchers have noted that fewer new businesses are opting to go to public these days.
There are plenty of ways for promising new entrepreneurs to raise money elsewhere,
particularly from private equity and venture capital.

New business IPOs that came to market plummeted after peaking in the 1990s. As a
consequence, the makeup of financial markets has changed dramatically with more firms
reaching the maturity of their diminishing stage. .

To alleviate these problems, the regulators have taken several positive steps. Most of these
efforts are meant to improve economic activity.

While businesses are still expected to follow proper disclosure requirements, the process of
launching an IPO has been simplifies and streamlined for new businesses. Costs have been
lowered and delaying factors removed.

2.5 The Changing Nature of Public Equity Market

Stock experts believe that the purpose of a public equity market in today's world is different
than it was twenty years ago. Previously, IPOs were just a way for companies to fund capital
expenditure. Investors for their part saw it as a way to generate higher returns.

Today, the purpose of getting listed on Wall Street is more about liquidity for the business. It
is used to motivate employees that are offered share schemes and gives founders a way to exit
the business, if they want.

For the investors, the stock markets offer liquidity at a reasonable return.

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