An initial public offering, or IPO, is a privately-owned company's first offering of stock to the public, and the traditional method of making the transition from a private to a publicly-traded company (i.e. obtaining a listing on the stock exchange). Generally the company in question will be small and is seeking capital to be used for expansion. However, sometimes larger private companies will issue an IPO in order to become publicly traded, or spin-off a subsidiary through an IPO.
Biotech startups will often make IPOs in order to finance the completion of a new drug application, if they have a promising product in their pipeline but need the capital to complete the necessary research. A startup might also go public in order to raise funds for the owner to pay back the support network of friends, family, banks or venture capital investors that helped them start the company. IPOs by larger companies can raise awareness of the company or subsidiary that might otherwise have been ignored by investors and potential collaborators.
For anyone investing in biotech, IPOs are risky because there is little historical information on the company and its worth. Also, companies offering IPOs are usually in transition. If you want to invest in an IPO, it may be difficult to anticipate how stock of the company will fluctuate. Biotech companies have the reputation for being very unpredictable.
To make an IPO, shares are offered from the company (issuer) with the help of an underwriter who evaluates the company and determines their value, and then sells the shares to investors for a commission. A company becomes public for the purposes of obtaining capital without having to approach private investors and repay loans. Once public, the company can offer additional shares on occasion to raise capital for expansion without incurring debt.