Which one of the following is not the true reason why firms want to go public?
A. The original shareholders’ liquidity needs to sell shares.
B. Firms want to attract potential buyers.
C. Firms want to win a first – mover advantage over competitors.
D. Firms want to receive more funding from venture capitalists.
E. Firms want to take advantage on good market timing
The correct answer and explanation is:
Correct Answer: D. Firms want to receive more funding from venture capitalists
When firms decide to go public, they generally aim to access capital markets, improve their visibility, and provide liquidity to existing shareholders. However, receiving more funding from venture capitalists is not a valid reason for going public. In fact, venture capitalists usually invest in companies before they go public, during the early and growth stages. Once a firm goes public, venture capitalists often use the initial public offering (IPO) as an exit strategy to cash out their investment.
The primary true reasons for going public include the following:
- Liquidity for original shareholders (Option A): An IPO allows early investors, founders, and employees to convert their shares into cash. This is often a key reason for choosing to go public.
- Attracting potential buyers (Option B): A publicly traded company may gain more attention and interest from institutional investors or strategic acquirers due to its transparency, regulatory compliance, and credibility.
- Gaining first-mover advantage (Option C): A company may go public early to gain a competitive edge, establish brand recognition, and secure market share before rivals.
- Good market timing (Option E): Companies sometimes choose to go public when market conditions are favorable to maximize their valuation and raise capital at a lower cost.
On the other hand, venture capital funding is typically private and aimed at companies that are still developing and growing. Once a company goes public, it is generally no longer seeking venture capital but rather institutional or public investor capital through stock offerings. Therefore, option D is not an accurate motivation for firms going public, making it the correct answer to this question.