What is an IPO/ What are IPOs?
Initial Public offering or IPO like the name suggests, is the first offering of shares of a private company to the general public.By allowing anyone to buy a share or stake in the company, and in future trade those shares on a market, the company loses its status as “private” and turns public.Here are the few noticeable changes:
What are the Changes from Private to Public company?
1.Shares in the company can now be publicly traded in an exchange market.
2.Anyone from the public domain can own a certain share of this company by simply purchasing its stock.
3.The public company will now have a new management and a Board of directors, that control aspects of management and finance of the company and make key critical decisions on behalf of other shareholders, in the best interest of the company for future growth and development.
4.The private company after turning public increases its own valuation several hundred times after turning public.
5.Massive increase in capital gained through IPO process allows the company to tap use this new wealth to fund future operations and expansions.
6.Increase in general infrastructure and more employees are hired.
Investment Bankers vs. Auction
Goldman Sachs CEO Lloyd Blankfien
Much debate has done the rounds of pre offering phases whether Investment Bankers and Underwriters are to be hired to distribute shares to the public or should the traditional auction be employed.Some features favour Underwriters while some see the benefit in using an auction.
1.Many aspects of an auction can be controlled be the issuing company itself,and they have greater control and possession of the entire process.
2.Prominent Underwriters that are hired to sell shares while keeping a percentage of the sales as fees.This can get extremely expensive for the issuer as the commission can be in the range of 5%-8%
3.Underwriters have access to a large pool of institutional investors that will contribute in a major way to the purchase of the stock.
4.An additional role that the underwriters play in the process is to help the issuers decide what initial price to set for the IPO.This can be crucial to first day price index and how well the stock performs.First day predictions are subject of much speculation and how well the stock does on the firs day goes a log way to ascertain future trends.
The most exciting and volatile IPOs of the last decade has been young internet companies that have sprung from obscurity, to trade massive volumes in a short period of time.Post offering, these .coms have risen upto solid billion dollar valuations.On the flip-side, Some of the big IPOs have faltered and fallen after first day trades.Most trade gurus point this toward the fact that these companies rush to get listed without a concrete future business plan.Investors love to see a long term blueprint of how the IPO funds are going to benefit the company over the next 5 years or so.
Etf vs Mutual fund vs Index fund
Exchange traded funds can be closely worded as a”mutual stock” as it has all the traits of a regular stock.It can be traded just as easily as any regular stock through a broker for a small commission.Good thing about this is that it is flexible and extremely useful for short term selling or short selling.This can be helpful for investors who speculate on a daily basis and have a diversified portfolio.So how much does it cost to buy and trade ETFs?
A relatively small commission to your trading broker and since its traded so often,it will attract taxes due to Capital Gains.Its a much cheaper alternative to Mutual Funds and Index Funds as the commission that the Fund managers take to manage the funds can be a huge chunk of your investment.This way it is easily managed by your broker,as there are less stocks to play around with in your portfolio.This keeps things simple and more efficient.
The popularity of ETFs has even billion dollar Hedge Funds investing in them.Hedge Funds are usually managed by a private investing firm headed by some of the most successful market gurus.
Investing Funds like all other Market investments have a small amount of risk associated with them.But unlike ETFs which individual buyers can buy through a broker,Mutual Funds are more “exclusive”.First off, the buy in amount is significantly higher than an ETF.This investment,along with thousands of other investors is pooled into a single fund and controlled by a Fund manager who invests it in options he deems profitable. There’s no comparing a Fund manager and a Stock broker.
The Fund Managers are extremely experienced and have a huge team of analysts backing him,for every move he makes.Investing in a Mutual Fund is beneficial for long term investment and compared to ETFs holds a slightly less risky position,as its price is set once in the entire trading session.The good part to this is that Fund managers don’t speculate and make slow calculated investment decisions.
One of the reasons that Mutual Funds are expensive to maintain is due to the fact that a percentage of your investment goes towards the Fund Manager for Managing your investment.This is in the range of 2-2.5%.Your investment can be redeemed or liquidated with equal ease at the Net Asset Value by the Fund Manager,and due to the fact that it isn’t traded more than once a day,the taxes benefits are greater as compared to ETFs.
The main feature that sets Index Funds and Mutual Funds apart are that Index Funds are not as aggressively and actively managed as compared to Mutual Funds.These are ideal for investors who want a less risky and more laid back fund,and who just put their entire portfolio in the capable hands of the Index Fund Manager.The reason its called the index fund is also because it buys and sells in accordance with the daily index on which market its investments are listed.Index Fund Managers also take a smaller percentage cut from the investment as compared to Mutual Fund mangers.
Since it isn’t so actively managed,the turnover ratio is less,hence taxes paid on these gains are also not high.Passive Managed funds like the Index Fund do not try to beat the market and are more selective in choosing their securities.Since these are so passive in their management,they cost less also to manage.Index Fund Managers charge anywhere from 0.3%-0.5% for managing your investment which is a much lesser compared to Mutual Fund management fees.
Shares and Investments of Venture Capitalists & Angel Investors
A simple layman’s guide to different kinds of investors in the initial stages of company development, in particular Angel investors and Venture Capitalists. There’s little more than a thin line between the two. This is for all the new startup enthusiasts who are curious about how to get to the stage of getting investors to pool in capital into your newly created company. Here are some primary differences between Angel Investors and Venture Capitalists (VC).
This is possible the biggest and most obvious differential that stands out foremost. The amount of capital that is given to founders in the early stages of operations are small in the case of Angel Investors, starting from about $500,000 to $1.5mn on an average.This is mostly seen as the second round of funding, the first being the seed round.In many cases If the company looks like it has above average prospects on paper, this round of funding is even passed until the VCs step in. VC firms are huge, and accordingly their investment is also on a much higher scale,usually staring from over a $ 1 million. They maybe a syndicate of private investors clubbed under one common investing platform, or smaller individuals that act on behalf of bigger players with controlling and allocating powers over a selected fund.
Since Angel Investors finance startup companies much earlier than the Venture Capitalists, they take their piece of the pie in return for their investment. They are thus allocated shares proportional to the capital they offer, this is in the range of 5%-8% of total company shares. In the subsequent rounds of funding when the company raises a much higher capital with the VCs, they have to allocate a higher number of shares to the new investors. By creating new shares to allocate to the VCs the total number of shares outstanding increases, thus diluting the existing stake of the previous round one investors. In this way the stake of Angel Investors reduces drastically as the Ventures pump in a significantly larger amount of capital.In most cases the Angel Investors share drops to well below 1 % after the VCs step into the fray. However the founders are protected against this dilution of share, or are prematurely bought out entirely by the VCs.
Top Seed Investors for startup dot coms
After any dotcom is conceptualized and starts raking in traffic, all webmasters want to get to the next step. They all want to see it get bigger than just google adsense. This requires a small startup capital to get off the ground. A small investment known as a seed investment is provided by seed investors at high risk. They pay you this just based on your idea. This money helps initially in paying for hosting fees, rents and other petty expenses>Dot com seed investors also give the company founder a whole lot of mentoring and experience as most of them have been involved in tech startups over a period of time. These seed in investors arrange for selected startups to live and nourish the idea for about 3 months until the seed is ready to get to the next round of funding if found promising.Seed investors are VCs on a smaller scale.
Yombinator is one of the biggest seed investing groups in the last 5 years.they have provided starting capital to some of the biggest players on the web including Reddit,Dropbox,Disqus and Scribd. They invest in two batches in a year and work with them for 3 months.The batches start from January to march and june to august.In these 3 months the founders of the startups will have to move to SF Bay area and work out from there.YC will help setup the company if it hasn’t already been done. They will assist in every way with the paperwork.Applications for a YC seed must be sent in before the batches start,and Ycombinator will short list those companies that they feel might have potential.After that,they will meet and interview them and give them $600 per group for travel expenses.IF selected they will be entitled to a check of little less than $20K. They work on the formula 11,000+ 3n ,where n is number of founders.For example,if there are 3 founders,then the check would be made out for 20,000.Which is the maximum.They don’t usually fund groups that have more than 3 founders,or less than 2.In return for this seed investment,they expect about 7% holding in the newly formed company.
One of the more selective seed capital providers.They work on behalf of bigger Venture Capital firms,investing their money in prospective dot com successes.Applications for TEchstars funding is accepted in the months of October and November.After they are reviewed, ten groups are selected for the program that runs for 3 months.Immediate funding is set as $18,000,and an additional 100,000 in the form of a convertible debt note.Perks runs upto include $250,000 worth of hosting,software,banking services,legal services among other things.If the program runs successfully and your company seems promising to get to the next level of angel/VC funding,then Techstars would like to be recognized as co founder and take its minimum ownership share.They too would love if there is more than one founder to begin with.Later this year,techstars will be on tv telecasting a reality show based on this business model.
Dreamit ventures gives seed funding to the tune of $25,000,which is $5000 + $5000 per founding member who will be involved in the program.Each yearly program will house another 15 startup companies who will get other help in other areas such as legal,accounting,pr,guidance and introductions to other VCs and Angels. Spread over a period of 3 months,Dreamit ventures prefers if a small team of founding members is already in place rather than just one person,so its easier to get things in place and roles to fill.