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Entrepreneurial growth - IPO as a means to finance growth

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  1. Introduction Introduction Introduction Introduction
  2. Entrepreneurial IPO's
  3. The going public decision
    1. Portfolio diversification & liquidity
    2. Facilitating acquisitions
    3. External monitoring and corporate governance
    4. Direct costs
    5. Indirect costs
  4. Process & pricing
  5. Discussion
  6. Conclusion

The decision to go public is often described as the most important milestone for a growing company. This process is not a stage that every company will try to reach, because in Europe particularly, the going public process is more an exception than the rule, and it's the decision of the company. The stock market is also considered as something dark, led by greedy investors that are only there to make money. Of course this judgment has been reinforced with the financial crisis in 2008 and the debt crisis in Europe in 2010. So why are entrepreneurial ventures are still interested in that kind of financing given the volatile characteristic of that kind of market? This literature review aims to put together literature developed in that field and see what are the main steps for an entrepreneur from the decision to go public to the management of a company listed in the stock market. The objective will be to discuss ideas developed in the literature by their author and compare if it's possible with other authors.

To start this literature review, it would be interesting to see how academics define an entrepreneurial IPO. Indeed, being an entrepreneur is often associated to early stage company and we often hear large multinational companies that are on the market for a long time go public. So, is it impossible for new entrepreneurial venture to raise fund through IPO? Or is the definition in the literature different from the common sense? Penrose has defined in 1959 3 potential limits to growth: managerial ability (conditions within the firm), product or factors markets (conditions outside the firm), and uncertainty and risk (Penrose, 1959: 43). Given those limits, researchers have found that the first thing that could limit the growth would be the lack of cash (Hambrick & Crozier, 1985). Without that cash, the firm could miss market opportunities to acquire new resources and sustain the growth of the company. Chahine Filatotchev & Wright (2007) has defined entrepreneurial IPO as ?those stock market flotations in which the original founders retain equity stakes and board positions?. The founder is often the block-holder or share the majority of the shares with early investors like business angels or venture capitalists.

[...] It's definitely a good way for a company to sustain the growth with a better trade. A company will be able to propose to acquire another company with their shares at a determinate exchange ratio share of my company for 3 shares of yours for example). Indeed, Bancel and Mittoo (2008) show that most of top managements think that IPO can help companies to fuel their growth and simplify M&A's. c. External monitoring and corporate governance Going public will have some consequences for the entrepreneurial venture. [...]

[...] Furthermore, at the beginning of the process, the investment bank will always prefer to work for a company that has a significant track record that shows that the company is already making good sales and has reasons to think that a growth path is possible for the future of the company. One of the most cited reasons to go public is to raise fund (Pastor, Taylor & Veronesi, 2006). It appears that according to a large sample of CFO, the ability to finance investment opportunities is among the most important benefit of introducing your company on the stock market. [...]

[...] If that firm has the characteristics to go public, it's of course a really good mean to finance the growth of the company given the benefits mentioned below. But it's also the opportunity for early stage investor to divest and leave the company. Wright, Robbie, & Ennew (1997) argue that venture capitalists are mainly focused on later stage ventures and management buy-outs, and they normally exit their investments when the lock-up agreement expires after the IPO. In contrast, Shane & Cable (2002) argue that business angels are under less pressure to cash in their investment and exit the venture, and this extends their time horizon. [...]

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