Entrepreneurial growth - IPO as a means to finance growth

Résumé du document

The decision to go public is often described as the most important milestone for a growing company. This process is not a stage that every company will try to reach, because in Europe particularly, the going public process is more an exception than the rule, and it's the decision of the company. The stock market is also considered as something dark, led by greedy investors that are only there to make money. Of course this judgment has been reinforced with the financial crisis in 2008 and the debt crisis in Europe in 2010. So why are entrepreneurial ventures are still interested in that kind of financing given the volatile characteristic of that kind of market? This literature review aims to put together literature developed in that field and see what are the main steps for an entrepreneur from the decision to go public to the management of a company listed in the stock market. The objective will be to discuss ideas developed in the literature by their author and compare if it's possible with other authors.

To start this literature review, it would be interesting to see how academics define an entrepreneurial IPO. Indeed, being an entrepreneur is often associated to early stage company and we often hear large multinational companies that are on the market for a long time go public. So, is it impossible for new entrepreneurial venture to raise fund through IPO? Or is the definition in the literature different from the common sense? Penrose has defined in 1959 3 potential limits to growth: managerial ability (conditions within the firm), product or factors markets (conditions outside the firm), and uncertainty and risk (Penrose, 1959: 43). Given those limits, researchers have found that the first thing that could limit the growth would be the lack of cash (Hambrick & Crozier, 1985). Without that cash, the firm could miss market opportunities to acquire new resources and sustain the growth of the company. Chahine Filatotchev & Wright (2007) has defined entrepreneurial IPO as "those stock market flotations in which the original founders retain equity stakes and board positions". The founder is often the block-holder or share the majority of the shares with early investors like business angels or venture capitalists.

Extraits

[...] Indeed, the stock market asks companies to put in place internal and external committees that will monitor the company to insure the reality of the figures. It could be seen as a huge expense for the company, and it's certainly the case because they have to pay external auditors, remunerate audit and remuneration committee as well as non-executive directors, but some academics see this monitoring as a benefit for the company. Bancel and Mittoo (2008) argue that exchange listing and external monitoring leads to better corporate governance practices, and consequently the firm value. [...]

[...] Working Paper, University of Florida Lucas, Deborah, and Robert McDonald Equity issues and stock price dynamics, Journal of Finance 1019–1043. Pagano, M., Panetta, F., and L. Zingales Why Do Companies Go Public? An Empirical Analysis, Journal of Finance Penrose, E Limits to the Growth and Size of Firms. The American Economic Review, 531-543 Reilly, Frank K Further evidence on short-run results for new issues investors, Journal of Financial and Quantitative Analysis 83–90 Ritter, J. & Welch, I. (2002). A review of IPO activity, pricing, and allocations. Journal of Finance 1795–1828. Stoll, Hans R., and Anthony J. [...]

[...] Process & pricing The going public process can be long and complicated for the entrepreneur. Indeed, several phases are required to properly enter the stock market with a lot of different actors. There are of course the issuer, some accountants that are preparing audited financials for the prospectus, joint bookrunners (investment banks) that are managing all the process and that are responsible of the success of the IPO, legal counsel that provides advice to the issuer and the investment bank and public relation firms that are assisting in the interaction with media. [...]

[...] But the question is if it is the good way to finance the growth of an entrepreneurial venture. I would say that it depends on the company because some may need a lot of financial resources and other not. I would rather advice the IPO to those companies that need financial resource and that can give to the investor good return potential for the future. References Bancel, F., and U. Mittoo. European Firms Go Public?”Working Paper, University of Manitoba (2008). [...]

[...] For example, in the case of a venture-backed company, of the VC had that strategy to leave the company after the IPO, and that the investment represented a substantial amount of the equity, it could be damageable for the share price if this investor would leave the company. Therefore, lock-up agreement obliges the early investors to stay a certain time after the IPO. This issue raises another question: If the founders of an entrepreneurial venture divest a certain amount of their holding in their own company, it could be a bad signal for external investors. That issue is in direct link to one cost of going public: the adverse selection (Pagano, Panetta & Zingales, 1998). [...]