There are several strategic reasons why a company decides to go public through an Initial Public Offering (IPO). While raising capital for business expansion is the primary motivation, going public also offers broader benefits like improving visibility, enhancing credibility, and gaining access to long-term investors.
How is a Company Valued for an IPO?
Companies use several internal valuation models such as projected earnings, discounted cash flow (DCF), and the dividend discount model (DDM) to determine a fair price range. However, the most credible valuation comes from market perception—what investors are willing to pay for the company’s future potential. This market-based value discovery can only happen once the company is listed and trading publicly. That’s why tech giants like Amazon and Google command premium valuations—they’ve proven their worth in open markets where demand meets supply.
Five Reasons Why a Company Goes Public
1. Raising Capital for Growth
The most common reason to go public is to raise funds. Instead of taking on debt, companies can issue equity and share ownership with public investors. These funds are often used to finance capital-intensive projects, new product lines, geographic expansion, or research and development, without the burden of repayment.
2. Providing an Exit to Early Investors
IPO acts as an effective exit route for early-stage investors such as venture capitalists and private equity funds. These investors typically seek returns after 5–7 years, and a public offering allows them to partially or fully divest their stake, monetizing their investment.
3. Increasing Brand Visibility and Credibility
Listing on a recognized stock exchange increases a company’s public profile. Examples like Avenue Supermarts (D-Mart) and Alkem Laboratories show how an IPO can drive awareness and attract wider institutional and retail interest. Enhanced visibility often translates to more business opportunities and stronger partnerships.
4. Telling the Valuation Story
An IPO is not just about raising money; it’s also a chance to present your company’s growth story to mutual funds, sovereign wealth funds, pension funds, and global institutional investors. A compelling IPO pitch backed by fundamentals can lead to better valuations and long-term shareholder confidence.
5. Creating Currency for M&A
Publicly listed shares become a powerful acquisition currency. For instance, companies like TCS, with multi-billion dollar valuations, can execute strategic acquisitions through stock-based deals. These stock swaps are valuation-driven and enable companies to scale quickly by leveraging their market cap.
3 Key Advantages of Being a Listed Company
1. Attracting Analyst Coverage
Once listed, companies receive coverage from equity research analysts. This leads to deeper market engagement, improved price discovery, and helps management communicate their growth plans to a larger investor base through earnings calls and guidance updates.
2. Unlocking Shareholder Value
Going public gives promoters and existing shareholders a way to monetize their holdings. Whether it’s using shares as collateral for business loans or selling part of their stake, having listed equity creates liquidity and financial flexibility.
3. Benchmarking for Future Capital Raises
After a year of trading history, companies can use their listed price and price-to-earnings (P/E) ratio as benchmarks for future fundraising—be it through qualified institutional placements (QIPs), rights issues, or foreign listings. This historical data simplifies valuation for subsequent capital markets transactions.
