There are several ways that companies can raise additional capital: debt, venture capital, mergers, private equity investment, and public offerings. This research briefly examines these types of capital infusion, and focuses on the initial public offering.
All methods of raising capital involve some cost. Raising capital through debt involves taking on interest charges, and companies may not be able to raise funds at competitive rates, depending on their credit history. In some cases, lenders have established debt-to-equity ratios which must be maintained by the company, which makes debt an unacceptable way to raise capital.
Venture capitalists look for a high rate of return on investments (30 to 40 percent on an annualized basis) and often require a predetermined exit strategy. This may include the sale of the company or a public offering to recoup their initial investment. Mergers can be a source of additional capital, but only if the target has excess surplus and the acquiring company has sufficient capital to make the acquisition or is willing to relinquish some level of control by paying stock for the acquired company. Private equity investment (other than venture capital) may be available, but private investors are likely to require a high rate of return, a degree of control over the company and, again, a guaranteed exit strategy.
A public offering occurs when a company sells shares of stock. An initial public offering means that the company has not previously issued stock. When investors purchase a share of stock, they are essentially purchasing a share of ownership in the company; the more shares they buy, the more of the company they own. This is why this type of financing is called equity financing: it directly affects the equity held by shareholders. Deciding to "take a company public," as this method is sometimes referred to, requires that a company's managers and current owners be willing to give u...