IPO Investment: Everything You Need to Know — The Line Between Success and Failure

Essential Information You Must Know Before Investing in IPOs

Initial Public Offering( (IPO) refers to the process where a private company first offers its shares to the public in the open market. Through this process, the company can raise significant capital, and investors gain an opportunity to invest in a new growth enterprise.

The reason investors focus on IPO is simple. Early-stage stock prices are often undervalued, providing opportunities for profit later on. However, IPO investments also come with high volatility and risks, so careful consideration is essential.

What Exactly Is an IPO?

) Basic Definition and How It Works

An IPO is the process by which a private company transitions to a listed company, making its shares available for trading on the securities market. This process generally involves six stages.

Stage 1: Planning for Listing
The company determines the amount of funds to raise, the number of shares to issue, and the timing of the listing. This decision is made after a comprehensive review of current market conditions and the company’s financial health.

Stage 2: Selecting Underwriters
Global investment banks like Goldman Sachs and Morgan Stanley, or major domestic securities firms such as Korea Investment & Securities and KB Securities, are chosen. The underwriters manage the overall IPO process, including company valuation, setting the offering price, and attracting institutional investors.

Stage 3: Disclosure and Price Setting
The company submits a preliminary listing application to the Korea Exchange (KRX) and files a securities registration statement with the Financial Supervisory Service. Subsequently, the offering price is finalized through a demand forecast process called Book Building.

Stage 4: Subscription and Allocation
Both retail and institutional investors apply for shares. The allocation depends on the subscription ratio; higher competition may make it harder to secure the desired amount.

Stage 5: Listing and Trading Commencement
Once trading begins, the first-day stock price can surge or fall sharply based on market expectations.

Stage 6: Post-Listing Price Movements
After listing, stock prices fluctuate over the long term depending on company performance, industry outlook, and market sentiment.

Why Do Companies Choose to Go Public?

Capital Raising as the Primary Goal

Raising funds through an IPO is a core objective for companies. For example, Coupang’s 2021 IPO raised about 4 trillion won, enabling significant expansion of logistics and delivery infrastructure. The raised capital is used for R&D, market expansion, debt repayment, mergers and acquisitions, and other business goals.

( Enhancing Credibility and Strengthening Global Presence

Public companies are required to disclose financial information regularly, which builds trust with investors and customers. It also helps companies strengthen their competitiveness in the global market.

) Realizing Returns for Early Investors( EXIT)

Early investors such as venture capitalists (VCs) and private equity funds (PEFs) can exit by selling their holdings in the market during the IPO. Startup founders and employees can also exercise stock options to realize substantial gains.

( Talent Acquisition Strategy

Public companies can offer stock options to employees, making it easier to attract and retain talented personnel for the long term.

The Pros and Cons of IPO Investment: The Big Picture from an Investor’s Perspective

) Key Advantages of Investing in IPOs

High Initial Profitability: Stock prices often surge significantly above the offering price during the early days of trading. For example, Airbnb’s IPO in 2020 had an offering price of $68 and closed its first day at $146, a 115% increase.

Access to Growing Companies: Many IPO companies experience rapid growth, offering long-term investment returns. Tesla, for instance, had an IPO at $17 in 2010 and, as of 2024, maintains a stock price around $400, delivering over 350 times return to early investors.

Increased Liquidity: After listing, shares are freely traded in the open market, allowing investors to sell at their preferred timing.

Enhanced Transparency: Listed companies are required to publish regular financial reports, enabling investors to assess company value more accurately.

Major Risks of Investing in IPOs

High Price Volatility: Stock prices may fall sharply after initial surges, contrary to investor expectations.

Company Growth Underperformance: If a company does not grow as expected, its stock price is likely to decline.

Lock-up Restrictions### (Lock-up): Post-listing, early investors and insiders are often restricted from selling shares for a certain period.

Limited Information: Before listing, company information is limited, making accurate valuation difficult. Poor performance can lead to rapid stock price declines.

Industry Uncertainty: Investing in emerging industries or startups involves high market risks, which can result in significant losses.

Successful IPO Cases: Evidence of Long-Term Growth

Airbnb( - Listed in 2020

Despite the COVID-19 pandemic, Airbnb attracted high investor interest, listing at $68. On the first day, it closed at $146, a 115% increase, and later exceeded $220 amid travel industry recovery.

) Tesla( - Listed in 2010

Tesla, listed at $17, benefited from the booming electric vehicle market, with its stock price reaching around $400 in 2024 (adjusted for stock splits). Early investors earned over 350 times returns.

) Alibaba( - Listed in 2014

Alibaba, China’s leading e-commerce company, listed on the NYSE at $68. It surged 37% on the first day to $93, and its market capitalization later exceeded $200 billion, marking long-term success.

IPO Failures: When High Expectations Collapse

) WeWork### - Failed in 2019

WeWork was valued over $47 billion and attempted an IPO but lost investor confidence due to excessive spending and internal management issues. The IPO was withdrawn, and it merged with a SPAC, but ongoing management problems led to bankruptcy filing in 2023.

Roblox( - Listed in 2021

Initially listed at $45 and surged to $77, but faced increased competition and poor earnings, leading to a decline of over 50% from the offering price.

) K-Bank### - Postponed in 2024

K-Bank aimed for KOSPI listing in 2024 but postponed due to low institutional investor interest and concerns over overvaluation.

Characteristics of Major IPO Markets and Investment Strategies

( Korea IPO Market

South Korea’s IPO market is rapidly growing, with innovative companies in fintech and biotech sectors going public. Government policies supporting startups and expanding venture capital investments are driving this trend.

However, foreign investors may face barriers such as complex procedures and dividend income taxation. It’s important to analyze local regulations and market trends carefully.

) US IPO Market

The US hosts the world’s most active IPO market, with NASDAQ###NASDAQ( and NYSE)NYSE### serving as primary platforms. Tech and biotech firms dominate listings, offering high liquidity.

However, strict regulations and disclosure requirements from the US Securities and Exchange Commission( (SEC) necessitate thorough analysis of company financials and industry outlooks.

) Hong Kong IPO Market

Hong Kong is a key financial hub for Chinese companies seeking overseas listings. Its strengths include high liquidity and openness to international investors, but policy changes in China and geopolitical risks are significant factors.

The industry diversity is limited, so there is a risk of over-concentration in certain sectors. Careful study of Chinese policies and economic risks is essential.

Practical Strategies for Successful IPO Investment

1. In-Depth Financial Analysis of the Company

Financial health is the most critical criterion for IPO evaluation. Focus on profitability, debt ratios, and cash flow.

Stable and high-growth potential companies are more likely to sustain stock price increases after listing. For example, Apple has maintained steady growth since its 1980 IPO, backed by solid financials and innovative products. Microsoft, listed in 1986, continues to grow based on stable earnings and market dominance.

( 2. Industry Outlook and Competitive Landscape Review

The growth prospects of the industry are key to IPO investment success. Companies in fast-growing sectors like AI, cloud computing, and biotech tend to sustain growth post-listing.

Conversely, companies in mature or highly competitive industries like traditional retail or wired telecom face higher risks of stock decline. Utilizing research reports and market data is recommended for industry analysis.

) 3. Management Capability Evaluation

The experience, leadership, and past performance of the management team significantly influence future growth. For startups, management quality can determine success or failure.

Evaluation methods include reviewing the company’s prospectus, management resumes, LinkedIn profiles, media reports, and past performance in other companies.

( 4. Risk Management Through Capital Planning and Diversification

Due to high volatility, careful capital planning and diversification are essential.

Capital Planning: Invest only a portion of your portfolio in IPOs, within your risk tolerance. Avoid overexposure.

Diversification: Spreading investments across multiple IPOs and industries (technology, healthcare, finance, etc.) reduces risk. Diversification minimizes losses from sector downturns.

Market Environment Analysis: During rising interest rates, growth stocks may decline, so analyzing macroeconomic conditions is crucial.

Conclusion: A Balanced Approach to IPO Investment

IPO investments offer significant opportunities for both companies and investors but involve high volatility and risks. Companies can raise large capital and fuel growth, while investors can benefit from early gains and long-term appreciation.

However, IPOs tend to be highly volatile in the short term, and stock prices can fall depending on financial health and market conditions. Investors should thoroughly analyze financials, industry outlooks, and management quality, and employ diversification and risk management strategies.

Since IPO markets are influenced by economic and policy factors specific to each country, careful monitoring of market conditions and regulatory changes is vital. With diligent research and strategic planning, IPO investments can become promising long-term opportunities.