There are many ways to stimulate an economy. Cutting corporate taxes, incentivizing consumer spending, and deregulation are just a few ways that governments have tried to urge growth in a national economy, and all seem to produce varying results. However, one creative way to inch an economy out of a downturn and toward prosperity is through the strategic use of Initial Public Offerings (IPOs).
By understanding what an IPO is, how it works, and the historic basis for its role as a potential economic steroid, it becomes clear that this initiative can effectively contribute to an economy’s growth on the national scale and provide investors with new and exciting ventures.
What Is an IPO?
When a private company undertakes the process of offering shares to the public, it does so via an IPO. Essentially, this refers to new stock issuances to a public market and is a proven way for companies to raise a lot of capital quickly and efficiently. It traditionally allows those who invested in a private company to take advantage of share premiums and receive dividends, while opening the doors for public investors to reap the potential rewards from their investment.
Private companies looking to “go public” often work with investment banks to determine if an IPO is the best strategy and to set the initial stock price. An often-overlooked aspect of an IPO is that founders and executives may use it as an exit strategy, whereby a portion of the raised capital is allocated to pay themselves out, as the company seeks to bring in new talent at the top.
Is It Time to Go Public?
An IPO allows growing private companies to accelerate their growth and create new jobs, both of which are vital to economic health. Going public isn’t something that a company’s directors want to jump into before they are ready. Here are a few clear signs that a company should consider an IPO:
- They have undergone extensive audits and their finances have withstood scrutiny.
- They are prepared for alternative action if the IPO does not go as planned.
- They are willing to defend any future growth plans.
- They have the combination of excellent marketing skills and strong financial numbers.
- They consistently produce accurate forecasts, as investors will shy away from a stock with a track record of fanciful forecasting.
This is especially important as a wave of failed IPOs could have a detrimental economic impact and may result in a company having to downsize or even close permanently.
Traditional Means for Economic Growth
The health of an economy is often tied to the gross domestic product (GDP), which measures the accumulated value of all goods and services a country produces within a year. Granted, there is no one factor that leads to a healthy economy; instead, it’s a combination of factors. An important one is the role that banks and lenders, respectively, play in setting interest rates and making funds available to businesses which, in turn, are used to invest in products, operations and growth.
Compared to more-traditional strategies, an IPO might seem like a radical way to maneuver an economy toward growth. The reality is that it’s hard for private companies to receive the type of capital infusion that a successful IPO offers. Even if profits are trending upwards, investor capital has the power to take a company to the next level much faster and more efficiently than sales.
IPO as an Economy Accelerant
An IPO can help an economy by creating new investment opportunities and fuelling growth within industries. They help companies grow faster, which typically results in job creation. A 2012 study conducted by the Kauffman Foundation found that the over 2,700 companies that went public between 1996 and 2010 resulted in employment of 2.2 million people and accumulated total sales over $1 trillion.
IPOs can also foster competitiveness in an industry, forcing companies to invest more in their workforce and other areas like research and development. Alternatively, any decline in the number of companies going public could stunt economic growth and adversely harm the job market.
IPOs can have a dramatically positive impact on an industry’s fastest-growing companies. In some ways, it rewards growth and innovation. It’s fair to assume that a positive correlation exists between economic growth and an upturn in new investment opportunities.
As most economies try to recover from the COVID-19 pandemic, IPOs should be part of their stimulus strategy to encourage growth and broaden private investment opportunities. An IPO’s ability to foster competition could also see companies go on hiring binges and invest in areas they would otherwise overlook. Consider that some of the stronger-performing IPOs in the last few years include Zoom Video Communications Inc., Moderna Inc., and BioNTech — companies that went public before the pandemic. This put them in a position to experience success over the last year and a half, making it likely that they will help the post-COVID world return to economic stability, while potentially enjoying a windfall of revenue.
Economies need a steady stream of IPOs to encourage companies to continue investing in innovation and expand their workforce. These are two economic pillars that cannot be ignored as an economy cannot be healthy with high unemployment rates and stagnant industries.
The Continued Economic Need for IPOs
As vaccination rates go up and COVID-19 cases go down in many countries, governments will naturally turn their attention to fuelling economic growth. It’s a monumental task that will require a multi-faceted approach and precise execution. IPOs are a proven way to rebuild an economy, carrying positive and far-reaching ripple-effects. While IPOs may suggest a circuitous route to prosperity, they are a known driver for job creation and greater innovation, with their offer to invest in something exciting and promising.
Rob Shapiro | Contributing Writer