Venture-Capital-Backed IPO
Refers to a company's initial public offering (IPO) that private investors have previously funded.
The initial public offering (IPO) of a company that private investors have previously funded is known as a venture capital-backed IPO. Venture investors view these IPOs as part of a strategic plan to recover any loss of their investments from the business.
To optimize their return on investment (ROI), investors typically wait for the right moment and conditions to launch this kind of IPO. Therefore, there are fewer opportunities for venture capital-backed IPOs in a poor economy.
IPOs and acquisitions are both referred to as exit strategies since business owners and venture capitalists can withdraw funds from their investments whenever they choose.
When criteria are satisfied, exit strategies are measures made by business owners, investors, traders, or venture capitalists to sell their position in a financial asset. For example, the exit plan of a shareholder describes how they want to sell their investment.
Investors and businesses offer this type of funding for companies with the potential for rapid expansion or have already shown rapid growth.
In return for an equity interest, venture capital firms or funds invest in early-stage businesses, accepting all associated risks in the hopes that some of the enterprises they are invested in will succeed.
Venture-capital-backed IPO businesses are often credited for driving private-sector economic development and employment in the United States. In addition, there has been a significant proportion of venture-capital-backed IPOs among all firms that have gone public.
Following the global financial crisis, there were fewer venture-capital-backed IPOs in 2008 and 2009. However, some firms that began as venture-capital-backed IPOs include Tesla Motors and Open Table.
Venture Capital-Backed IPOs Process:
A VC-based IPO often occurs as follows, depending on where a company is in its cycle when getting capital from the VC firm:
- VC Funding
After several rounds of due diligence, the business receives VC funding, which gives it greater exposure, an optional valuation in the investment community, and a 5-year exit plan that outlines its position in terms of crucial metrics when it goes public. - Strategy
The VC firm offers the company mentorship, human capital, strategic guidance, and maybe extra cash between the investment and the IPO—often at pre-agreed valuations that are advantageous to the VC firm.
To sell part of their investment, the VC firm may also let the business enlist other investors before the IPO. - Milestones
The VC firm will aim to create targets that make the company more corporate. Examples include- adding an experienced CFO,
- enhancing internal controls and reporting procedures, and
- implementing fully audited financial statements.
- Investment Banks
Along with the VC firm(s), the company starts talking to investment banks about whether an IPO would be a good idea as it gets closer to the goal date for one, which is typically 18 months away.
The investment banks will provide presentations describing why they should be the investment's underwriter.
For instance, Goldman Sachs created a presentation with the unfortunate title, "Your path to $1 trillion," as WeWork was getting ready for its disastrous IPO. - Market Trends
After selecting the investment bank (or banks), they will examine market trends, engage in casual conversations with industry peers (mainly private investors and investment funds that may be interested in the offering), and evaluate interest in the company's shares at a specific price.
The route to an IPO can get started in earnest if the reaction is favorable. - Due diligence
The IPO due diligence process starts at this stage. The company must produce many documents, written statements, financial statements with notes outlining detailed transactions that business owners rarely use, and more.
This is likely the most challenging round of due diligence that any company will encounter throughout its lifetime. - Arranging the IPO Date
Suppose the due diligence procedure is going well. In that case, the investment bank will meet with the SEC and the company owners to schedule a date for the initial public offering (IPO), typically within a year.
The VC-backed business can 'go to market on the specified date, allowing the VC firm to liquidate some of its stock at multiple times their initial investment, assuming all goes according to plan and the due diligence doesn't reveal any negative surprises.
Venture Capital
Private equity (PE) has a division dedicated to venture capital. PE has historical origins dating to the 19th century, but venture capital as an industry only emerged after World War II.
Venture capital covers the gap between traditional, lower-cost sources of money available to ongoing concerns and sources of funding for innovation.
For the venture capital business to successfully bridge that gap, it must offer a sufficient return on investment to draw private equity funds, enticing profits for its participants, and enough upside potential to entrepreneurs to draw high-quality concepts.
Simply put, the difficulty is to continuously generate a higher return on investment in initiatives that are risky by nature.
Venture capital is a popular form of funding for businesses that lack access to debt sources like bank loans and capital markets or have a weak operating history.
The companies that venture capitalists invest in typically give them an equity stake. They consequently participate in making business decisions.
Investors can start investing in venture capital after the first round of seed fundraising.
The preferred exit plan for venture capitalists is to receive a return on their investment. Other options include merging and acquiring the company or issuing shares to the general public through an IPO.
Advantages and Disadvantages of Being a VC-backed Company
It's a good idea to analyze all the advantages and disadvantages of venture capital before you pursue investment, like with any startup funding choice. So here are 5 benefits and 5 drawbacks of venture capital to think about.
| Advantages | Disadvantages |
|---|---|
| The ability to raise a significant amount of capital. | Firms are often a low-revenue, high-risk investment, forcing owners to sell shares at a lower price. |
| The company may swiftly establish its own network by working with other firms in whom the venture capital firm has invested. | Management sometimes relinquishes control of their company strategy. |
| As soon as the investment is made, the company normally receives greater visibility, appearing on the VC firm's website and several other outlets. | Funding is rare, with VC companies reviewing hundreds of pitch decks before Investing in a single startup. |
| In addition to mentoring, the VC firm will frequently assist the company in which it invests in by recruiting fresh people and fundraising cash. | VC firms must conduct extensive due diligence. Warrants and restrictions imposed by the VC firm may impede future rounds of funding for the firm. |
Venture Capital Funding vs. Venture Debt or Loan Financing
Venture capital works best for businesses that are relatively new to the industry or do not have the financial wherewithal to raise money from the general public, in addition to angel investment and several other seed funding options.
Due to their unimpressive operating histories, these businesses need help to obtain sizable loans from banks or other financial organizations. In other words, business loan options might be a good funding choice for companies that have already been adequately established.
Obtaining funding through venture capital is entirely distinct from getting a loan. Banks maintain the right, regardless of whether the firm is making profits or losses, to demand repayment of their loans and interest when corporations borrow money from them.
However, venture capital money is given in return for a share of company equity and provides no investor protection. The investor would receive returns only if the business activities are effective and profitable in the upcoming months or years.
It is worth mentioning those venture lenders will only lend to startups after V.C.s have invested in them. However, once a venture capitalist has invested, venture lenders are quick to follow since the V.C. makes an implicit pledge to return the money.
Venture-Capital-Backed IPOs in 2022
IPOs for VC-backed firms were almost non-existent in 2022, with only 22 completed during the year's first half. The number of corporate M&A exits remained stable in Q2, with more than 200 transactions completed.
Following a record-breaking pace of initial public offerings (IPOs) priced on U.S. markets in 2021, IPO activity started to drop in the first half of 2022. According to FactSet statistics, 1073 firms raised $317 billion in IPOs in 2021; in the first half of 2022, the total was 92 companies raising a little under $9 billion.
The first half of this year saw a decline in IPO activity due to two key variables. First, following a peak in the first quarter of 2021, the number of Special Purpose Acquisition Companies (SPAC) IPOs declined in the final three quarters of the previous year before slowing to a trickle in the first half of 2022.
Second, after a decade of loose monetary policy, the U.S. stock market experienced its worst first half of a year since 1970 as central banks were compelled to raise interest rates in response to growing global inflation aggressively. The S&P 500 was down 20.6% as of June 30.
Examples of Venture Capital-Backed IPO
Many companies went public in venture capital-based IPOs. The greatest example is Google. At the end of the 1990s, its creators, Larry Page and Sergei Brin, looked for V.C. funding for their brand-new search engine.
They received $25 million in funding, giving up 33% of the business's stock and giving the company a $75 million pre-money valuation.
They used this funding to assemble a team and advance the technology. Given that Google's market value is currently hovering around $1.32 trillion, those early investors eventually earned a return of approximately 3,500 times their investment.
Another great example is Uber. The ride-sharing startup was established in 2009 and received close to $20 billion in funding from investors such as Morgan Stanley, SoftBank, and G Squared. The business raised $500 million in its latest round of funding in 2018.
In May 2019, an IPO supported by venture capital saw Uber go public. The corporation was valued at 120 billion by pricing its shares at $45.
FAQs
An authorized, wealthy individual who makes investments in start-ups or businesses in the early phases of growth in exchange for stock in the venture is typically referred to as an angel investor.
Although angel investors may offer their business experience to the company, they are often happy to receive an ownership interest in return for their contributions.
A group of financiers who pool their resources to look for possible investment possibilities might also be angel investors. Angel investors can be private persons familiar with the financing possibility, such as family members or friends.
Investment partnerships that acquire and run businesses before selling them are known as private equity. Private equity companies manage these investment funds on behalf of accredited and institutional investors.
A private equity firm, a venture capital firm, or an angel investor will often make a private equity investment.
All of these types of investors provide working capital to a target company to foster expansion, the development of new products, or restructure the company's operations, management, or ownership.
Each type of investor has a unique set of objectives, preferences, and investment strategies.
A corporation's first selling of stocks to the general public is known as an initial public offering (IPO).
A firm is regarded as private before going public, often with a small number of investors such as founders, friends, family, and business investors.
The general public can purchase shares and acquire a stake in a company for the first time when it conducts an IPO. Going public is another name for an IPO, and an investment bank is normally in charge of the underwriting process.
Seed capital refers to the type of financing that covers a startup business proposal's costs. It is the funds received to start working on a business or product idea. Private investors are often the primary source of funding for companies in exchange for shares.
Seed capital is typically provided by family and friends, although it can also be obtained through crowdsourcing, angel investors, and the business owner's own cash. It is the initial financial stage of launching a firm.
Also known as series A investment, it is the second funding stage of a startup received from the venture capitalist or angel investors, usually to hire new talents and cover development. Investors often receive a stake in the startup in exchange for funding.
A venture capitalist is a wealthy investor willing to invest for the long term by funding startups and small companies with large potential markets that wish to grow in exchange for equity.
Researched and authored by “Sara Nasrallah” | LinkedIn
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