IPO: GOING PUBLIC

The Initial Public Offering (IPO) is sometimes considered the coming of age for a growing company. With only a tenth of biotech companies in the US trading publicly, however, not every company will do an IPO. The average biotech company that IPO'd in the 1990's was 5 years old and had raised a total of $25M before going public at a pre-money valuation of $75M-$100M. The exception was the class of 1999-2000, which, after raising an average of $50M, did initial offerings at an average pre-money of $300M. Some of the reasons why the genomics bubble of 1999-2000 deviated from the norm are discussed below.

Instead of examining the IPO in isolation, consider it merely another financing event; the public market is just another source of funding and, once a company's stock trades publicly, it must still conduct business as usual. The benefit of becoming a public company is that all the shareholders that got shares prior to the IPO are able to sell their shares on the open market (once the mandatory 180 day lock-up expires). Furthermore, being public facilitates subsequent fund raising because companies have a wider range of options: sell more stock to the public markets (secondary offerings), sell stock to private equity funds (Private Investment in Public Equity -- PIPE), or do a convertible debt offering. `The downside of being public is having to address the concerns of hundreds and eventually thousands of shareholders and analysts, requiring intense Investor and Public Relations (IR/PR). Public companies also face more complex accounting and auditing obligations. Management can find these new responsibilities distracting.

The IPO is mediated by an investment bank, a.k.a. the underwriter, which negotiates with public equity funds to purchase the newly issued shares. The funds will typically sell some of those shares in the "aftermarket" to eager investors who did not have a chance to buy the shares in the IPO. The investment bank underwriting the IPO will often try to price the shares such that the initial buyers will be able to sell them at a higher price in the aftermarket. Therefore, the IPO is driven by demand from the large funds, who, in turn, try to be attuned to the buying interest of the investment community at large.

The balance between investor optimism and pessimism is tipped by many factors other than the fundamental strength of companies. For example, underwriters must wait for rising markets and periods of liquidity (when investors are buying/selling stock in large volume) to ensure that prospective buyers of the IPO shares will be able to later sell the shares for a profit. When all the variables are aligned and companies begin to IPO, the IPO window is said to be open. However, the duration that a window remains open is determined by how the newly IPO'd stocks perform. If these stocks fall, large funds will stop participating in subsequent IPOs, thereby shutting the window. Investment banks try to make sure that the strongest companies IPO before the weaker ones during any given window.