What Is an IPO Backed by Venture Capital?

The initial public offering of a firm that has previously been funded by private investors is referred to as a venture capital-backed IPO. Venture investors see these offers as part of a strategic strategy to recoup their financial commitments in the business. To optimize their return on investment, investors often wait for the right moment to launch this kind of IPO (ROI).

Understanding IPOs Backed by Venture Capital

Private equity includes venture capital. Investors and businesses provide this kind of finance to businesses that have 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 assist will succeed.

After a preliminary round of seed money, the traditional venture capital investment happens. The Series A round of institutional venture capital is the first investment used to finance expansion. So that they may optimize their return via an exit plan like a venture capital-backed IPO, venture capitalists give seed cash. Additionally, since they contribute significantly to the early funding of new businesses, they have particular rights and obligations on things like when and how a firm goes public.

Venture capitalists watch for the best moment to launch an IPO and wait for it. To ensure that they may leave their job in a firm while receiving the highest possible return, this is done. Being acquired—being bought out by another company—is a venture capital-backed company's alternative to going public. A trade sale is the purchase of a firm with venture capital backing. Both approaches are referred regarded as exit strategies because they let entrepreneurs and venture investors profit from their investments.

Various sources constantly report on the number of mergers and acquisitions, as well as IPOs supported by venture capital (M&A). Due to poor investor confidence, there are often fewer venture capital-backed IPOs during recessionary periods. Due to the financial crisis, the number of venture capital-backed IPOs in 2008 and 2009 was at an all-time low.

Particular Considerations

Similar to angel financing and crowdsourcing, venture capital is a desirable alternative for start-up businesses. This is particularly true for businesses with short operational histories and small enough sizes to avoid going to public markets for capital raising. Companies in this category may not be in a position to execute a debt offering or get a bank loan.

Raising debt or a loan is considerably different from attracting venture money. In contrast to venture capital provided in return for an equity position in the firm, which has no legal protection and is speculative in nature, lenders have a legal right to interest on a loan and repayment of the money regardless of the success or failure of a business. The expansion and profitability of the company have the single greatest impact on the return on a venture capitalist's investment. In other words, a venture capitalist assumes both the risk of financial loss and the prospect of financial gain.

Example of IPO Backed by Venture Capital

Both Tesla and Open Table conducted venture capital-based initial public offerings. Uber is a fantastic example of a venture capital-backed initial public offering (UBER). The ride-sharing startup was established in 2009 after receiving 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 raised almost $8 billion by pricing its shares at $45 a piece.

What distinguishes an initial public offering from venture capital?

Purpose. When a business no longer wants to remain privately owned, wants to grow, or wants to give the chance to profit from stock ownership, an IPO may be employed. A VC stock transaction, on the other hand, usually takes place when a new company requires funding to launch.

Does venture capital finance publicly traded businesses?

Venture capitalists invest in businesses that have a strong potential for development or that can rapidly create cash flow. Venture capitalists often exit their investments by selling to a trade buyer, having the firm go public, or doing a management buyout.

In an IPO, how do venture capitalists profit?

The firm will eventually, ideally, either sell to a bigger company for a better price or start trading on the stock market via an initial public offering (IPO). In any case, at that time the venture capitalist will be able to profit by selling his or her shares.

What does the term "venture backed" mean?

A startup that receives funding from venture capital is known as a venture-backed startup. Since many startups are still in the early stages of development, they often lack the liquid assets necessary to run, develop, and grow their companies.