Module 1. Introduction to Stock Markets
Initial Public Offerings – Part 1
4.1 – Overview
When a company decides to offer its shares to the general public for the first time, it does so through a process called an Initial Public Offering (IPO). This is a significant milestone in a company’s journey — it marks the transition from being a private company to becoming a public one.
In this chapter, we’ll understand the reason companies go public, how they raise funds in earlier stages, and what leads them to launch an IPO.
The precursor chapters cover basic market concepts. At this stage, it’s essential to understand why companies raise money and how the IPO fits into their growth story. Subsequent chapters will build on this, exploring intermediaries, the listing process, and investor perspectives
4.1 – Overview
A company needs money to grow — whether it’s to build products, expand into new markets, hire employees, or improve infrastructure. This money can come from two main sources:
Debt – Borrowing money from banks or institutions (has to be repaid with interest)
Equity – Raising money in exchange for ownership (no repayment, but part-ownership is given away)
In the early stages, companies typically avoid debt because:
They don’t have steady income to repay loans
Banks may not be willing to lend without security
That’s why equity funding becomes the go-to option. Initially, this comes from friends, family, or angel investors. As the business grows, venture capitalists and private equity firms get involved.
But there comes a stage when even larger capital is required — say ₹500 crore or more — for nationwide expansion, launching new verticals, entering global markets, or building large-scale infrastructure. At this stage, companies go public by offering their shares to retail investors, institutional investors, and the general public — this is called an IPO.
4.2 – Origin of a Business
To understand how a company reaches the stage of an IPO, let’s look at the typical journey a business takes:
1. The Idea Stage
Everything starts with an idea. For example, someone wants to launch an organic skincare brand. The founder has a vision but no capital to execute it. So they start looking for initial support.
2. Seed Capital (Friends, Family & Angel Investors)
At this stage, the business is just beginning. The founder may approach:
Friends or family for a small loan or investment
Angel investors – individuals who invest in startups at an early stage
These investors give money in exchange for equity (a small share of the company). The risk is high, but the potential reward is also high if the company becomes successful.
This funding helps the business:
Develop the product
Launch a basic version of the brand
Start operations and testing
3. Venture Capital Funding (Series A, B, C…)
Once the company proves that its product works and people are willing to pay for it, it needs more money to scale.
This is when venture capitalists (VCs) come in. These are professional investors who fund startups in exchange for ownership. The money raised in these stages is used to:
Expand operations
Hire teams
Build technology
Increase marketing
These rounds are called:
Series A – First major VC funding
Series B – For growing operations
Series C/D/E – For national/global expansion
With each funding round, the valuation of the company increases, and the earlier investors’ shares become more valuable.
4. Business Matures – Time for the Big Leap
After several years of consistent performance, growth, and market presence, the company is now ready to scale even further — maybe expand to international markets or launch new product lines.
However, the amount of capital required for this stage is very high — in hundreds or thousands of crores. And this is where IPO becomes a powerful solution.
Going Public: Why Launch an IPO?
A company may choose to launch an IPO for several reasons:
1. Raise Large Capital
The biggest reason is to raise a large amount of money quickly, without taking debt. This money can be used for:
Expansion
Paying off existing debt
Research & Development
Acquisitions
2. Give Exit to Early Investors
Angel investors and VCs who invested early in the company may want to sell some of their shares and make profits. IPO gives them a liquid market to exit.
3. Improve Brand Visibility & Trust
Being a listed company adds credibility. Customers, partners, and employees view listed companies as more stable and trustworthy. It also helps attract better talent.
4. Use Shares as Currency
After an IPO, the company can use its shares to buy other businesses, reward employees (ESOPs), or raise future funds more easily.
Key Takeaways from This Chapter
Every successful company starts small — with an idea, effort, and seed capital.
Equity funding happens in stages — seed funding, angel funding, VC rounds, and finally, an IPO.
An IPO is a way for a company to raise a large amount of capital from the public to fund its next phase of growth.
IPOs also help existing investors and founders monetize their shares.
IPOs bring transparency, increase trust, and change the ownership of the company from private hands to public investors.
Summary Table
| Stage | Funding Source | Purpose |
|---|
| Idea/Startup | Founders, friends, family | Basic setup, prototype |
| Seed Stage | Angel investors | Launching product, early operations |
| Growth Stage | Venture capital (Series A, B) | Expansion, team building, marketing |
| Expansion Stage | Series C/D, Private Equity | National/international scale-up |
| IPO Stage | Public investors (Retail + Institutions) | Large-scale funding + liquidity |