Companies that are raising capital by creating and selling new shares do so to improve the financial health of the business. Equity has two great advantages over bank loans and other forms of debt: it does not have to be repaid, nor are there regular payments to be made dividends are paid at the option of the directors. In general, capital raising IPOs are undertaken in order to:

• raise cash in order to expand the business of the company, or

• reduce the debt levels (leverage or gearing) of the company.

The decision to go public for many companies is a strategic decision, not just a fund raising decision. The IPO process can be a catalyst for developing the company's strategy more fully. It can also be seen as the final step in the financial development of a company.

There is a mythology of company development, particularly strong in the USA, that culminates in the IPO. The IPO company of lore is founded in a garage and sees its financing needs met with ever more sophisticated instruments, as illustrated in Figure 1.5. On establishment, the founders' savings typically finance companies. As the business grows, the founders may borrow or seek investment from friends and family. At a certain level of development, bank financing is sought. If a company is growing rapidly, it may require additional equity capital, provided by a venture capitalist or institutional investors. Finally, the company goes to the public markets by flotation to finance the...