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  • Writer's pictureSanni Salokangas

Why do companies go public? Benefits of an IPO and the SPAC hype

When a privately owned company makes the decision to go public, they list their shares in stock exchange. This is called an initial public offering and it lets the general public buy the company’s shares, from a stock exchange platform, for example. Going public is a long and overwhelming process for any company and it is usually done for multiple reasons.


An IPO lets early investors cash out their investments. This means that through an IPO, an investor that put down money early on for the company gets to see their investment in liquid. An IPO is like a fresh start for investors: They can decide whether to sell some stakes in the company or even get rid of them completely. Before an initial public offering, also friends, family, or angel investors get to see the return for their investment that initially helped to get the company started.


Second reason to go public is to raise more capital. When shares are sold to the public, the proceeds can be invested back into the company. For an IPO-mature company, raising capital traditional ways, such as with VCs or bank loans, might be too expensive. Going public is an easier and cheaper way and in addition, being a public company may secure better chances for future loans.


Third reason for an IPO is publicity. A known company going public is a big deal, drawing attention from all over the world. An IPO can boost the company’s public image and brand awareness, leading to more customers and users. Also, public relations are an important aspect of the IPO process for securing, for example, new potential investors for the company’s next phase.


SPAC mergers

A special purpose acquisition company or a “blank check company” raises money through an IPO for the sole purpose of acquiring other companies. To strive away from traditional IPOs, SPACs are gaining popularity as they offer many advantages for the company going public. SPACs are usually formed by established investors. First created in the 1990s, SPACs have gained popularity only recently. Within a single year, SPACs raised 40 billion dollars in funding in 2020, compared to the 13.6 billion dollars in 2019.


Using a SPAC to go public is a booming trend as it allows the company to raise capital even when market is volatile, or liquidity is limited for some reasons. It is also an easier option for earlier stage companies to go public, due to their difficulties to predict finances is not a deal-breaker in a SPAC merger. It also shortens the timeframe of the IPO process - which can often be fairly long- and may even lower transaction fees with, for example, the investment bank.


The sponsor in SPACs go through a fundraise that is very similar to one of a traditional IPO. The key differences are that there is no operating company, nor financials to share. The proceeds raised for a SPAC are stored in a trust account, typically for 18–24-month period. If the SPAC fails to complete an acquisition of a company during that time, cash in the trust account is returned to investors.


As with any company, SPAC merger does not mean instant green for a company. However, there are many SPAC companies that are successful and keep making money for their investors. Few notable recent SPAC mergers are an electric vehicle company Lucid Group in 2021 in a deal worth 24 billion USD and another EV company, Swedish Polestar in 2022 for 20 billion USD.


Sources:

From Startup to Exit, Shirish Nadkarni 2021


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