Ticker Symbols:- Saudi Arabian Oil Co. (ARAMCO:AB) - $7.49, Alibaba Group Holding Ltd. (BABA) - $10.04, Meta Platforms Inc. (META) - $498.12

The Current Climate

The current economic climate has been nothing but a reality check for everyone but for Venture Capitalists (VCs) that are always on the lookout for the next big thing to sink their seemingly unlimited billions in, it's been especially true. With a high interest environment, coupled with some sticky inflation, the global economy has not been overly generous of late on the high stakes front.

Now sink may not be the most appropriate word choice but, the bulk of VCs tend to lose money on most businesses especially in the tech sector, where most IPOs come from.

But it hasn’t been all doom and gloom and there are still some picks worth taking a look at. But before we do, we need to understand why a business would transition from a private one to a public one.

Why They Do It...

The cracks of the matter are usually financially motivated and centre around the need to generate capital to help further their growth, reduce debt, or fund other business operations. Most companies usually start off either boot-strapped or get some angel investor in the form of friends or family. Now, the premise of this type of funding that comes before a company goes public, takes a couple of forms. That being a business loan, a shareholding exchange in the business or even, though rare, as a gesture of goodwill.

There are a couple of reasons for listing on a public exchange. With the obvious being the ability to raise more capital, building awareness of the company, or even as an exit strategy for those early investors we alluded to earlier. Whatever the reason, the process is rather costly and extensively stringent for all the obvious and the not so obvious reasons like, public good, policies, laws governing process and all. So, this has to be factored in by the company opting to go this route.

The Lengthy Runway...

We will briefly explain the process as it’s too detailed for this article to cover but for the sake of context, we will outline the steps below. Firstly, a company needs to select an investment bank that will provide underwriting services. The next step is due diligence and regulatory filings. At this stage, the filling company selects an underwriting arrangement that is either a firm commitment, best efforts agreement, all or none agreement or an arrangement utilising a syndicate of underwriters.

The underwriter will then have to draft a set number of documents namely, an engagement letter, a letter of intent, an underwriting agreement, a registration statement and a red herring document. All the above documents form part of the regulatory requirements and during which the due diligence is conducted on the filling company and all these documents need to be filled with the Securities Exchange Commission (SEC).

The next step is the pricing. This happens once the IPO is approved by the SEC and the effective date is decided. On the day before the effective date, the issuing company and the underwriter decide the offer price (i.e., the price at which the shares will be sold by the issuing company) and the precise number of shares to be sold. This is then followed by the fourth step which is stabilisation. This is done by the underwriter and has to provide analyst recommendations, after-market stabilisation, and create a market for the stock issued.

Legends Of The Landscape

An IPO is considered to be successful if the company’s market capitalization is equal to or greater than the market capitalization of industry competitors within 30 days of the initial public offering. This might seem a tough bar but, that is why the process of selecting an underwriter, market conditions, investor sentiment in the industry and other factors, are all critical in the timing and decision making when it comes to IPOs.

Some IPOs that were considered blockbuster include the likes of ARAMCO:AB which had its IPO on the 5th of December 2019 and managed to raise $25.6 Billion when it went public. BABA listed on the 18th of September 2014 and raised $21.8 Billion and META went public on the 17th of May 2012 and raised $16 Billion.

There are other ‘not so successful’ ones but won’t delve into that just yet. Part 2 of this article will cover some of these ‘duds’ and look into some potential ‘unicorn’ contenders that are coming up, as we also evaluate whether SPACs are actually a better route to take.