The Return of the IPO

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Investments: Episode 51

Facebook raised another $500 million and looks to be on a course for IPO in the next year or so.

The market for initial public offerings (IPOs) has been anemic since the dot-com bubble burst in the early 2000s. But venture capital and angel investment has been very robust over the last five years. Eventually those investors are going to want to realize their gains.

IPOs serve three main purposes:

1. To raise additional capital to fund the cash needs of the business.
2. To facilitate liquidity of existing investors.
3. To create a form of currency, in shares, for acquisitions.

It's highly unlikely that Facebook needs the cash at this point. With over half a billion eyeballs viewing the ads it serves up they are almost certainly raking in tons of cash. And that cash makes acquisition relatively easy for all but the largest of targets.

Facebook's maneuvers are most likely aimed at facilitating liquidity. All those billions in valuation are worthless until they are turned into cash.