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Venture-Capital-Backed IPO

The initial offering of shares of a company primarily supported by venture capital investors

What is a Venture-Capital-Backed IPO?

A venture-capital-backed IPO is the initial offering of shares of a company that’s been mainly supported by venture capital investors. Such a type of initial public offering (IPO) is part of a judicious plan by investors to recover all or a part of a loss of their investments from the company.

 

Venture-Capital-Backed IPO

 

The venture capitalists await favorable market conditions before going public to maximize the returns on their funding. Therefore, the chances of venture-capital-backed IPOs in a lean economy are less.

A company backed by venture capitalists can also opt for an acquisition. Both acquisition and IPO are called exit strategies, as venture capitalists can make money on their investments or make an exit anytime they want. Due to the high volume of capital available in the market from venture capitalists, it takes longer for venture-capital-backed IPOs to happen.

 

Summary

  • Venture-capital-backed IPO refers to a company going public that has been funded by venture capitalists.
  • Venture-capital-backed IPOs are an exit strategy where investors make money from their investments.
  • Venture-capital-backed companies are primarily small businesses or start-ups that exhibit high future growth potential.

 

Venture Capital

Venture capital is a type of funding provided to small firms and start-ups that are presumed to demonstrate huge growth prospects. Such a form of financing is used by venture capitalists to earn an equity share in the new firm.

Venture capitalists provide funding to the firms that experienced accelerated growth in the past and are expected to expand at a similar rate and small firms that are growing at a remarkable rate. Although such investments are risky, the possibility of higher expected returns makes them attractive to private investors.

Venture capital is a popular fundraising source for companies that lack access to debt types like bank loans and capital markets or with an inadequate history of operation. Venture capitalists usually receive an equity stake in the company they invest in. Thus, they become involved in making company decisions.

Venture-capital-backed IPO companies are considered primarily responsible for the U.S. economic growth and employment in the private sector. Also, there’s been a high fraction of venture-capital-backed IPOs among all the companies going public.

In addition, a large segment of entrepreneurs believes that choosing venture capital for funding will be the best way to grow their businesses.

 

Venture-Capital-Backed IPOs in 2019

The U.S. financial market observed a total of 80 venture-capital-backed IPOs in 2019 – a reduction of 19% from 2018 figures. However, there were larger offerings with around $29 billion of gross proceeds.

The highest quarterly number of venture-capital-backed IPOs in 2019 was 35, which was recorded in the second quarter after the government shutdown. However, the last quarter of 2019 witnessed only 16 venture-capital-backed IPOs.

Despite the reduced number of offerings in 2019, the venture-capital-backed IPOs raised an average of $366 million, the highest amount since the debut of Facebook in 2012.

 

Venture Capital Funding and Debt Financing

Venture capital funding works well for companies that are new to the market and/or are not financially capable of raising funds on their own. Due to their unimpressive operation history, the companies find it difficult to arrange loans from financial institutions or banks.

Venture capital funding is very different from arranging a bank loan. When companies borrow money from banks, they become liable for regular interest payments and the payment of the loan amount after a specific period, regardless of whether the business makes a profit or a loss.

Whereas, venture capitalists lend money in trade for an equity stake in the company. There is no legal protection offered on the return on investments. The venture capitalists will receive returns only if the business becomes profitable in the future.

 

More Resources

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Venture Capital Investing
  • Public Companies
  • Capital Raising Process
  • Offering Price

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