What is IPO? Initial Public Offering — Definition, Process, Investing

What is IPO? — Initial Public Offering Explained

IPO (Initial Public Offering) is the first public debut of company shares on a stock exchange, the process of transforming a private company into a public joint-stock company with shares available to all investors. On the Warsaw Stock Exchange (WSE), IPO is also called "first public offering".

Freenance thoroughly explains IPO mechanisms, from company motivations to practical aspects of investing in stock market debuts and risk analysis related to new issues.

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Why Do Companies Decide on IPO?

Raising Capital for Development

Main IPO motivation is fundraising:

• Financing expansion — new factories, branches, acquisitions
• Debt repayment — refinancing expensive loans
• R&D investments — new product development, technologies
• Marketing and branding — strengthening market position

Benefits for Current Owners

Investment monetization:

Founder owns 100% of company worth 100 million PLN
↓ IPO — sells 30% for 30 million PLN
↓ Maintains control (70%) + cash for development
↓ Remaining 70% value increases thanks to new investments

Additional benefits:

• Exit strategy for VC/PE — funds can sell shares
• Prestige and recognition — public company status
• Employee motivation — stock options, ESOP
• Business credibility — easier contracts with large clients

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IPO Process Step by Step

Phase 1: Preparation (6-12 months)

Financial due diligence:

• Accounting audit — 3-year statement verification
• Company valuation — by independent experts
• Legal analysis — intellectual property, litigation
• Business plan — 3-5 year projections

Legal documentation:

• Prospectus — 200-400 pages of detailed information
• KNF approval — process may take 3-6 months
• Compliance — adaptation to public company requirements

Phase 2: Marketing and Bookbuilding (2-4 weeks)

Investor road show:

• Institutional investor presentations — funds, banks
• One-on-one meetings — with largest funds
• Retail presentations — for individual investors
• Media relations — interviews, press conferences

Price setting:

Initial range: 25-30 PLN per share
↓ Demand analysis from investors
↓ Comparison with similar companies  
↓ Final price: 27 PLN per share

Phase 3: Subscription (1-2 weeks)

Share allocation:

• Institutional tranche — 80% shares for funds
• Retail tranche — 20% for individual investors
• Oversubscription — reduction when demand > supply

First trading day:

• Opening fixing — first market price
• Trading — shares available to everyone
• Monitoring — price behavior observation

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Types of IPO Offers

Primary vs Secondary Offer

Primary offer:

• Company issues new shares
• Funds go to company for development
• Dilution — reduces existing shareholders' % stake

Secondary offer:

• Current shareholders sell existing shares
• Funds go to sellers (founders, VC)
• No dilution — number of shares unchanged

Mixed offer — combination of both types

Division by Size

Large Cap IPO (>1 billion PLN):

• Large corporations, often spin-offs
• Examples: PKN Orlen (1999), PZU (2010)
• Lower risk, stable returns

Mid Cap IPO (100M-1B PLN):

• Developing sector companies
• Examples: LiveChat (2021), Asseco SEE (2019)
• Moderate risk and potential

Small Cap IPO (<100M PLN):

• Startups, family companies, niche players
• Highest risk and profit potential
• Often on NewConnect

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How to Invest in IPO? — Practical Guide

Pre-Offer Analysis

Prospectus analysis:

1. Business model — how does company make money?
2. Competition — position against rivals
3. Management team — experience, track record
4. Financial situation — profitability, debt, cash flow
5. Fund use — what will company spend IPO money on?

Red flags in prospectus:

• No profitability — losses for last 3 years
• High debt — debt > 60% of assets
• Frequent management changes — lack of stability
• Unclear plans — general descriptions of fund use
• Dominant shareholder — >75% after IPO (corporate governance risk)

Subscription Strategies

Conservative strategy:

Subscribe only to proven companies:
- Minimum 3 years profitability
- Stable revenue growth pace
- Known brand or niche leader
Example: Asseco, Cyfrowy Polsat

Speculative strategy:

Target high first-day returns:
- New technologies, trends
- Small companies with high potential  
- Accept total loss risk
Example: CD Projekt, Allegro

Diversified strategy:

Subscribe to every IPO with small amounts:
- 5-10k PLN per offer
- Statistical long-term advantage
- Accept 30-50% IPOs may lose value

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IPO Results on WSE — Historical Analysis

First Day Statistics

Average D+1 returns (2020-2025):

Key conclusions:

• 60% IPOs gain on first day of trading
• Average first-day gain: +8.2% (2020-2025)
• Very high volatility — from -45% to +156%
• Technology sectors gain more often and more

Long-term Returns

Performance after 12 months:

Analysis of 150 IPOs from 2010-2023:

Profitable after year: 45%  
Loss-making after year: 55%
Average return: -12.4%
Median: -8.1%

Top 10%: >+150% 
Bottom 10%: >-70%

"IPO underperformance" phenomenon:

• Most IPOs lose value in first 2-3 years
• Mature companies perform better than start-ups
• Small-cap IPOs have highest volatility

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Examples of Successful and Failed IPOs

Success Stories

Allegro (2020):

• IPO price: 43 PLN
• First day: 70 PLN (+63%)
• Peak (2021): 135 PLN (+214%)
• Key factors: dominant position, e-commerce boom, COVID-19

CD Projekt (2010):

• IPO price: 16.5 PLN
• Peak (2020): 464 PLN (+2712%)
• Key factors: international game success, console expansion

Failure Stories

GetBack (2017):

• IPO price: 24 PLN
• Bankruptcy (2019): 0 PLN (-100%)
• Problems: aggressive accounting, excessive debt, poor risk control

LC Corp (2007):

• IPO price: 65 PLN
• Financial crisis: 3 PLN (-95%)
• Problems: real estate bubble, high leverage

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Practical Aspects of IPO Subscription

Where and How to Subscribe?

Through online broker:

• XTB: 19 PLN subscription fee
• mBank: 0.4% of value, min. 30 PLN
• Santander: 0.5% of value, min. 25 PLN

Subscription process:

1. Log into broker platform
2. Find offer in "New Issues" section
3. Set amount — how much you want to invest
4. Confirm order — funds get blocked
5. Wait for allocation — results after 2-3 days

Share Allocation — How It Works?

In case of oversubscription:

Offer: 1M shares at 50 PLN = 50M PLN
Demand: 200M PLN (4x oversubscription)

Retail tranche: 10M PLN available
Subscribed: 40M PLN

Reduction ratio: 10M/40M = 25%
If you subscribed for 10,000 PLN → you receive 2,500 PLN worth

Allocation priority:

• Premium clients — higher investment thresholds
• Long-term clients — loyalty rewarded
• Random drawing — for identical applications

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IPO Investment Risk

Specific IPO Risks

Lock-up period:

• Founders and VC cannot sell for 6-12 months
• After lock-up expiry — possible downward pressure
• Calendar monitoring — important expiry dates

Information asymmetry:

• Management knows more than investors
• IPO timing choice — companies debut at good moments
• Window dressing — result enhancement before IPO

Euphoria and FOMO:

• Media hype — excessive publicity
• Retail hysteria — irrational investor behavior
• Hot IPO market — new issues market overheating

How to Minimize Risk?

Due diligence checklist:

☑️ Read entire prospectus (not just summary)
☑️ Check financial history — minimum 3 years of data
☑️ Analyze industry — trends, competition, prospects
☑️ Assess management — previous experiences, success/failures
☑️ Understand business model — revenue sources, costs, entry barriers
☑️ Check valuation — P/E, P/S comparison with competition
☑️ Identify risks — what factors could harm?

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IPO vs Other Forms of Investing

IPO vs Secondary Market Stocks

IPO vs Venture Capital Funds

For individual investor:

• IPO — accessible from 100 PLN, high liquidity, transparency
• VC — minimum 40-100k EUR, 5-10 year lock-up, due diligence by professionals

Freenance recommends: For most individual investors, diversified portfolios of mature companies are better choice than IPO speculation.

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Most Important IPO Investment Rules

5 Golden Rules

1. "Don't invest more than you can lose" — IPOs are high-risk investments
2. "Read the prospectus" — don't rely on media hype
3. "Diversify" — don't put everything into one IPO
4. "Avoid hype" — loudest IPOs often disappoint
5. "Think long-term" — first day is not exit strategy

Freenance Recommendations

Beginning investors:

• Limit IPOs to max 5-10% of portfolio
• Choose companies with proven business
• Avoid start-ups and unprofitable companies

Experienced investors:

• Can increase allocation to 15-20%
• Consider pre-IPO opportunities (private equity)
• Monitor lock-up calendar for exit strategy

Remember: IPO is lottery ticket with fundamental analysis elements. High return potential balances with high total loss risk.

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Article is educational and does not constitute investment advice. Freenance reminds about high risk of investing in initial public offerings.