How Do Companies Raise Money Through Markets?

Companies raise capital to grow, expand, or run operations by tapping into financial markets. They can sell stocks through Initial Public Offerings (IPOs) or issue bonds, accessing capital from investors instead of relying solely on loans or internal cash.

In this article, we explain how companies raise funds, covering IPO basics, how IPOs work, and other methods of raising capital. You’ll learn the main company financing options businesses use to secure money and fuel growth.

Raising Funds Through Different Methods

Public companies often turn to capital markets to raise large sums of money, enabling them to expand operations more efficiently than relying on debt alone. Understanding how companies raise funds through these markets is essential for both investors and business owners.

IPO Basics

IPOs allow a privately held company to sell its shares to the public, becoming a publicly listed firm. How IPOs work generally involves several key steps:

• Selecting underwriters to manage the process.
• Drafting and filing regulatory documents, including a prospectus.
• Conducting roadshows to determine investor interest.
• Determining the share price through book building.
• Listing shares on a recognised stock exchange.

Example: Airbnb’s 2020 IPO raised $3.5 billion, pricing shares at $68 each and the company valuation was over $47 billion at the time of listing. The IPO was heavily oversubscribed, reflecting strong global investor demand despite pandemic related uncertainties.

Pros of IPOs:

• Significant capital influx for growth.
• Enhanced brand visibility globally.
• Improved liquidity for shareholders.
• Stock can be used for acquisitions.
• Attractive incentives for employees.

Cons of IPOs:

• High costs and fees.
• Greater regulatory oversight with mandatory quarterly reporting.
• Share prices may fluctuate post-listing.
• Reduced privacy as financials become public.
• Pressure to meet short-term performance expectations.

Bonds

Companies also raise capital by issuing bonds, which allow them to borrow money from investors. In return, the company promises regular interest payments and the eventual repayment of the principal when the bond matures. Bonds are issued in the primary market, either publicly as part of an offering or through privately placed bonds.

The company’s creditworthiness is assessed by rating agencies like Moody’s S&P Global Ratings, and Fitch Ratings, which influences the rate of return investors receive.

Example: In 2013, Apple issued $17 billion in bonds, one of the largest corporate bond issuances ever. The funds were used to finance dividend payments and share repurchases at interest rates lower than market levels, despite having sufficient cash on hand, which was one of the

Pros of Bonds:

• No ownership dilution.
• Predictable financing costs.
• Interest payments are tax-deductible.
• Long maturities provide stability.
• Access to diversified investors, including institutions and retail.

Cons of Bonds:

• Repayments are mandatory.
• Risk of default
• Operational restrictions via covenants
• Can impact the company’s credit rating

Issuing bonds is a key company financing option and an important method of raising capital, offering an alternative to equity and IPOs for securing funds.

Equity vs Debt: Key Trade-offs

Equity and debt are the two main ways companies raise capital. Equity means sharing ownership with investors, while debt involves fixed repayments without giving up control. The choice depends on risk, cash flow, and growth goals.

Other Company Fundraising Methods

Decisions, among how companies raise capital and company financing options, hinge on stage, market conditions, and costs. Startups lean on venture capital, mature firms prefer bonds. Public markets via IPOs suit scaling needs, balancing liquidity against transparency.

• Private Placement

Private placement involves the sale of securities directly to select institutional investors. In 2018, Tencent Holdings raised approximately $5 billion through a private placement to institutional investors to support strategic investments and expansion initiatives.

Pros:

• Faster than IPOs
• Lower costs
• No public disclosure
• Flexible terms

Cons:

• There is a limited number of potential buyers
• Future dilution risk
• Less liquidity

• Venture Capital

Venture capital is an equity investment method used by early-stage, high-growth start-ups. For example, Andreessen Horowitz’s investment in Stripe supported the company’s rapid growth in global digital payments.

Pros:

• Expertise from strategic guidance from investors
• No repayment obligation

Cons:

• Loss of equity
• Pressure to scale

• Bank Loans

Bank loans provide quick access to debt through term loans or revolving credit lines.

Pros:

• Retains ownership
• Flexible repayment terms

Cons:

• Requires collateral
• Interest burden
• Credit limits

• Follow-on Offers (FPOs)/Rights Issues

These involve issuing additional shares after an IPO to raise capital for growth or debt repayment.

Pros:

• Continued access to public markets
• Priority for existing shareholders
• Known valuation based on market price

Cons:

• Share dilution
• Price pressure
• Market timing risk
• Underwriting costs

Conclusion

How companies raise funds depends on their business stage, risk tolerance, and market conditions. Early-stage companies often choose venture capital for funding and mentorship, even though it involves giving up equity. Mature companies like Reliance and Tesla prefer private placements for speed and flexibility.

IPOs help companies raise large amounts of capital and gain visibility, as seen with Airbnb. Bonds allow companies like Apple and Microsoft to raise funds without losing control, but they require regular repayments.

Regulators such as the U.S. Securities and Exchange Commission (SEC) and other global market authorities ensure transparency in company financing options. Choosing the right mix of funding methods helps businesses grow and stay competitive.