IPO

A company always belongs to someone. This ownership is divided into shares, so-called stocks. In a young company, these shares are usually held only by the founders and a few investors. An IPO is the moment when such shares are offered for public purchase for the first time. After that, anyone with a brokerage account can buy them on the stock exchange, the regulated marketplace where shares are traded. The abbreviation stands for Initial Public Offering; in German, this is called a 'Börsengang'.

What a stock market listing changes for the company

The most obvious reason for an IPO is money. A company issues new shares and receives capital in return that it does not have to repay. A bank loan would be different: that has to be repaid with interest. For companies that operate at a loss for years but want to grow quickly, this is a crucial difference. Technology companies in particular often need billions before they turn a profit.

The second reason is mentioned less often, but is equally important. Early investors and employees with stock options hold shares they cannot sell. As long as the company is private, there is hardly any buyer. The IPO creates a market and turns this paper ownership into real money. This is called an exit.

The price for this is control and transparency. A publicly listed company must regularly publish figures, usually every quarter. Revenue, profit, risks, and executive salaries become public. In addition, thousands of shareholders now have a say, at least through the annual general meeting. Some founders avoid the IPO precisely for this reason and prefer to seek their funding from private investors.

From prospectus to first price

An IPO is not organized by the company alone. It hires investment banks that accompany the process and place the shares with large investors. These banks are called underwriters. Together with lawyers and auditors, they prepare the prospectus, a document often several hundred pages long. It contains the business model, the financial situation, and a long list of possible risks. A regulatory authority reviews whether this prospectus is complete.

Then comes the roadshow. Management travels to large investors such as funds and insurance companies to promote the stock. Their buying interest forms the order book, from which the offering price is derived. On the first day of trading, however, the market decides. If the opening price is significantly above the offering price, this is called underpricing: the company could have raised more money.

There are alternatives to this classic route. In a direct listing, no new shares are issued; existing owners simply sell directly on the stock exchange. And in a SPAC, an already publicly listed empty shell acquires the company, which thereby goes public indirectly. SPACs were very popular around 2021 and are now considered risky, since many companies listed this way lost significant value.

IPOs in tech news

IPOs appear in business news almost daily. Well-known examples include Facebook's IPO in 2012 or that of chip designer Arm in 2023. In Germany, companies such as Delivery Hero and Porsche AG went public. The valuation is usually mentioned in this context, meaning the calculated total value of the company: number of shares times price.

For the AI industry, this topic is especially exciting. Companies like OpenAI or Anthropic are still private and finance themselves through a few large investors. Whether and when they go public is considered an important benchmark. A so-called IPO window only opens when market sentiment is favorable. In uncertain times, companies often postpone their IPO by months or years.

A common misconception is worth clarifying at the end. Anyone who buys shares during an IPO only gives their money to the company if these are newly issued shares. If, on the other hand, existing shareholders sell their shares, the money goes to them. And the fact that a price rises on the first day says little about long-term success.