Venture Capital-Backed IPO: What it is, How it Works, Example

What Is a Venture Capital-Backed IPO?

A venture capital-backed IPO refers to the initial public offering of a company previously financed by private investors. These offerings are a strategic plan by venture capitalists to recover their investments. Investors wait for an opportune time to issue this type of IPO to maximize their return on investment (ROI).

Key Takeaways

• A venture capital-backed IPO is the initial public offering of a company previously financed by private investors.
• Venture capitalists use VC-backed IPOs to recover their investments in a company.
• Investors wait for the most optimal time to conduct an IPO to earn the best possible return.
• Low investor confidence during lean economic times can limit the number of VC-backed IPOs on the market.

Understanding Venture Capital-Backed IPOs

Venture capital is a type of private equity provided by investors and firms to high-growth companies. Venture capital firms invest in early-stage companies in exchange for an equity stake, taking on associated risks. The first round of institutional venture capital to fund growth is called the Series A round. Venture capitalists provide seed capital to maximize their return through an exit strategy such as a venture capital-backed IPO.

Venture capitalists wait for the most optimal time to conduct an IPO to exit their position in a company while earning the best possible return. The alternative to a venture capital-backed IPO is acquisition. Both options serve as exit strategies for venture capitalists and entrepreneurs.

Reports regularly track venture-capital-backed IPOs and the volume of mergers and acquisitions (M&A). Fewer VC-backed IPOs occur during lean economic times due to low investor confidence. The financial crisis in 2008 and 2009 saw record low numbers of venture-capital-backed IPOs.

Special Considerations

Venture capital, like angel investing and crowdfunding, is an attractive option for new companies that cannot raise capital in public markets. It is different from raising debt or a loan as the return on investment depends entirely on the growth and profitability of the business. Venture capital carries a risk of loss along with the expectation of a return.

Example of Venture Capital-Backed IPO

Tesla, Open Table, and Uber are prominent examples of venture capital-backed IPOs. Uber raised nearly $20 billion from venture capitalists, including Morgan Stanley, SoftBank, and G Squared. The company went public in May 2019, raising roughly $8 billion.