Back to the Basics: Why Companies Go Public + The 3 Financial Statements Beginners Must Know

0:00So if you're a beginner, we're generally pretty anti IPO. Just because the odds are not in your favor when you invest that way. But IPO is when a company first offers shares in the market. And they have this weird road and pony show that these investment bankers and Wall Street guys all get together. And they go find their favorite lawyer buddies. And they all sit in a room and just figure out how to extract money from whoever. I don't know. Money gets extracted in one way or the other. This show is sponsored by Liquid IV. Now that the weather is finally heating up, one of my favorite ways to step away from spreadsheets and the SEC filings is getting outside for an early morning run.

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2:54Sign up for your$1 per month trial today at shopify.com slash beginners. Go to shopify.com slash beginners. That's shopify.com slash beginners. You're tuned in to the Investing for Beginners podcast. Investing for Beginners podcast. The show for the long-term investor. We cut through the noise to focus on what works. Compounding, discipline, and the conviction to buy wonderful businesses and stick with them. Your path to financial freedom. Start now. Welcome back to the Investing for Beginners podcast. Today, we are going all the way to the beginning. If you've never invested before and you want to, or if you just have some basic beginner questions, we're going to try to answer to some of those today.

3:46And one of the things we're going to answer today, Andrew, is why does a company even go public? What's the purpose? Are they just trying to get more money uh you know what is the purpose of wall street and all of that it's it's a great question and it does set the foundation what are we doing when we buy a stock what is the point obviously the points to make money but why are companies doing it and it is an interesting topic especially in 2026 because you have companies that are waiting to go public longer and longer and longer. There's a really well-respected thinker in the industry named Michael Mobison, and he's talked about how the number of companies that have gone IPO and gone public has gone less and less, and companies are waiting longer and longer to go public.

4:38So it does make for a very good question. And like in, I guess, any big decision, There are multiple factors that could go in to a company going public. Let's talk about the one that's usually on people's minds when we're talking about stock market and Wall Street, money. When you are an entrepreneur, you don't necessarily have a chance to cash out for all of the money that you've put into it. Especially these tech startups that you might see. one of the things that's interesting about all the different tech companies we have seen in the last couple decades is their industries tend to mature into something that's winner take all um you've seen this like google is is probably the best example of that i'd be curious steven do you split your time 50 50 between google and bing or are you just an all google guy what's Bing exactly right like nobody splits their time between Google or Bing it's winner take all so a lot of the tech companies are like that and so the way they operate is they burn as much cash as they can to try to get to that king of the hill spot and obviously we're seeing it with AI also so imagine yourself as a founder in a startup where you are just burning cash as much as you can to try to get to the top of the mountain Once you do finally get to the top of the mountain It's not always easy to cash out And so you can go public And the benefit to going public Is you can finally cash out For years and years and years of work that you've done And that's what a lot of these founders will do They're basically trading ownership Of their company to get more capital So they can invest in R &D Or whatever it is that they're doing What is the risk to the company in doing so?

6:44I know we talked a little bit a few episodes back. They take certain measures to make sure someone doesn't buy up enough shares to get on the board or whatever. Are there any other risks that the company will take on by going public like that? Yeah, I think there can be several. Maybe one is growing too fast. Another one could be not having a good place to put the money. and sometimes having momentum die in your company can be really really painful for a company as well so it can be risky for a ceo of a company if so i i use this as an example because um this is what happened to facebook and mark zuckerberg there's a great breakdown of it from the acquired podcast i recommend if you have what is it five hours of your life you can go check that out it's quite a beefy episode.

7:39I've mentioned it several times. It's a good one. But basically, they talk about how Facebook was so overhyped at the IPO that when it had these impossible expectations that no company could ever fulfill, the stock crashed pretty bad and you saw that momentum go the wrong way. And how if Mark Zuckerberg didn't have majority ownership over the company as CEO, he probably would have been kicked out and Facebook probably would have given up on some of the revolutionary things that they were working on, like generating revenue from mobile. So that could be a big risk of the general public, the market, Wall Street.

8:22They don't understand what you're doing inside of the company and they don't have that same long-term mindset that you might have, or they don't have the same vision for the future that you might have. And so when times get tough, Wall Street could bail on you and that can be really tough. You know, having a falling stock price can be tough for many reasons. But one of those being, especially in today's age where lots of employees get stock options, it can be pretty demoralizing to get stock options and see that value go down year after year after year. So there's ripple effects. But yeah, that's the biggest one that comes to mind right now.

9:00So you talked about IPO-ing, and as we record this in April 2026, I almost said 2025. But as we record this in April 2026, a huge company is getting ready to IPO, and that's SpaceX. Can you talk about what the difference between an IPO stock and a normal stock are? It's a good question. So if you're a beginner, we're generally pretty anti IPO, just because the odds are not in your favor when you invest that way. But IPO is when a company first offers shares in the market and they have this weird like road and pony show that these investment bankers and Wall Street guys all get together and they go find their favorite lawyer buddies and they all sit in a room and just figure out how to extract money from.

9:55um, whoever, I don't know, money gets extracted in one way or the other. Um, so there's just this weird, it's just not like your everyday stock, you know, your everyday stock. I want to buy more shares of Apple. I go log into my brokerage account. I buy a couple of shares. We're done with IPOs. There is this huge game and they, they talk about like, you know, they play with the scarcity and the demand and they say, Oh, we can only offer this many shares and, Oh, you better get in now because you know we're twice oversubscribed and it's just really very a very interesting event and um there's just a lot of excitement i mean you can't blame people for for some of the excitement around ipos like being able to be first in a company like spacex if they ever go to mars that's pretty exciting um for me like if in and out or chick-fil-a ever went ipo i would be all over that most likely i say that halfway tongue-in-cheek but like you know there's just these businesses where you just want a piece and sometimes it doesn't matter how much you pay and that's what can happen in an ipo it's just this huge bidding war because everybody wants a piece of the action and um your your normal rationality and your logic kind of go out the window when everybody just wants a piece i can i can i have a list of companies that i am just waiting like please IPO um Chick-fil-A definitely one USAA is another but with with that comes risk too because when a company goes public and I mean risk for us as the investor because Chick-fil-A is obviously one of the most well-known in the way that they are ran companies in this country, everyone knows Chick-fil-A crushes numbers wise.

11:45Chick-fil-A suddenly decides, hey, we want to go even bigger. So we're going to go public. Suddenly things inside the company can start to change. Why, what is the cause of that? And what are those risks for us as the investors? What are the causes of that? I don't have a good answer for you. I wonder if it's just, you know you got this influx of money so you're just higher and you don't consider culture too much that could be something um maybe it's pressure from wall street because wall street's so short-term focused they're looking they want to get those quarterly numbers and and they will punish you if you don't get those quarterly numbers so it becomes this this feedback loop um there have been companies who have bucked that trend like warren buffett plays with his own rule book or has played.

12:38Other companies, you know, they, Costco doesn't play these cornerly games. Like everybody knows Costco is in it for the longterm, but those companies were very intentional about setting that as the standard. If you don't intentionally set that as a standard, it can be very easy to get drawn into that loop of just trying to please wall street because stock goes up and everybody's happy. that maybe that's maybe that's the biggest one is is that that kind of risk yeah i mean that's that's kind of what i had in mind is you know right now we'll use chick play as the example the only people they have to please are their employees well i guess their board of directors their employees and their customers if they go public now all of a sudden they have the entire investing community that they have to please.

13:33And if they don't, then all of a sudden their stock starts to dip, their stock starts to dip, their shareholders start to get upset, their shareholders start to get upset. Now, all of a sudden they're losing money. And I mean, that's the beauty of the stock market is where Chick-fil-A can go take out a$10 million loan to expand from a bank they're going to have to pay interest on that um they could get that i guarantee they they could have that in probably five minutes if they go public um for sure and but they don't have that interest and they don't have all that stuff they have to worry about but it's not it's not quite that clean because like like we said that they do have all these other things they have to answer for yeah it's a very good point and something i should not glaze over.

14:22There are a lot of, maybe not risks, but just obligations that come with being a public company. You have to have these certified audits. You have to have these financial statements that go out every quarter. You have to have certain compliance and just so many things around the requirements to stay on the New York Stock Exchange or the stay on NASDAQ. Um, so those are real costs. Those are real time commitments and they're not minor. So when we talk about why are companies not going public and I'm glad you mentioned Chick-fil-A cause that's a really good example. Historically going public has had this almost like I've made it kind of moment.

15:08Like, okay, now you're legit cause you're public. And there is still some of that. And the effect of that, I think, varies depending on what kind of business you are and who you are. But some of that's maybe less impactful as it was in the past with the internet and the way people's brands have been able to just be completely shared and become part of the common vernacular without needing to go public. so some of that incentive has gone away now just because of where we are as a society i guess and companies like chick-fil-a are deciding you know what we don't need all that noise we don't need the notoriety or the brand recognition of going public so we'll just keep going private and more power to them like that's that's they're the owners that's their choice they do what they want and it doesn't matter how many people want a piece um if the benefits don't outweigh the the risks and the obligations then yeah stay public i mean stay private chick-fil-a does not need wall street's help at least not right now um i would and part I guess part of the main reason why I want Chick-fil-A to go public is I just, I want to, I want to see their financials.

16:37Like they're, they are pretty open about their business and their model and what they do, but I would really just love to see their 10k man. Like, yeah. Oh, it'd be so awesome. I think last time I looked, they were third in the fast food market. McDonald's was obviously number one. But when you compare the number of restaurants of McDonald's to Chick-fil-A, it is insane. The Chick-fil-A is there. Insane. Yeah. They have a percentage of a small percentage of what these other major fast food chains have. And it is just, oh, man. All right. I digress. I can talk about how much I want to see their financials all day.

17:21but i mean and i think that's the biggest thing is why would they why would they risk it if they don't need to um which begs the question just do you have any theories on why spacex is ipoing now now that springtime is here it is time to update and reset my wardrobe last month i talked to you guys about how i was getting my shipment from quince in the mail i got myself a three pack of Lima Cotton shirts, and they are quite easily my favorite shirts to wear right now. The material is soft but still airy, so I feel cool while I'm wearing it, but comfy at the same time. Looks great, looks premium, and the price was not what I expect to pay for that type of quality.

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19:47I finally had a light bulb moment about a stock we've all heard about, growing 18 % a year out of 15 PE. I share this insight in a special deep dive report to subscribers of my research service, Value Spotlight. The report is called A Generational Moment, Reigniting Human Connections Through a Tangible Network of Intangible Assets. For a limited time, you can access this research at a discount at einvestingforbeginners.com slash reignite. That's einvestingforbeginners.com slash reignite. Yeah, coming from somebody who knows zero about the company, right? Maybe 0.00001. So two ideas. One is I've heard from founders and entrepreneurial circles and things like that.

20:35They say raising money is all about timing. So they could see advantageous timing. But then the obvious answer is maybe they have one or two. Again, this is coming from somebody that has no idea what they're doing, but maybe they have one or two reusable rockets and they want to get to 20 and they want to do it like in three years so it just makes sense like they need the money to to make these rockets and you literally put your growth path accelerate like 10x your growth path um a business like theirs it makes sense so that would be my guess what i what do you think i think it's the latter i think they're they're ready to massively expand and i'm a huge nerd i'm a huge space nerd if we ever colonize mars i am there i'm i'm i don't care how much it costs like yeah you're the first you're the number one customer i will i will sell body parts and whatever i have to do to raise the capital to to uh to be the first colonizing mars like i call dibs on your hair so i can have a really second piece but um but no like i i think that's what it is i think that and i've heard this the same sentiment like you know when it comes to raising capital timing is everything especially when you're going to IPO um and I'm sure if we we dug we could find plenty of examples of where a company IPO'd at the wrong time um and so I think there's something that they're saying right now that makes them think it's the right time they want to expand aggressively um because I mean And I think they're just ready to take this to the moon, literally.

22:23And I'm super excited about it. And I want, like, I have to talk myself out of being excited about them IPO-ing. Right. Because it's like, no, we don't, I don't, I don't buy IPOs. I've done it twice and it's burnt me every time. And hey, lessons learned. I'm not mad about it. I learned my lesson, I think. But man, I want to be on the train, dude. I get it. I mean, I might have to call you for you to talk me off the ledge getting on this train because I love SpaceX as a company. I love what they do. And I think I mean, come on, dude, they can land a rocket. That is so freaking cool. I don't care if you're a space nerd.

23:13That is freaking cool that they can land a literal rocket. like come on well you know they do there are always these unicorns right these companies that the numbers don't apply to them and they go to the moon and how many stocks like tesla i don't i haven't checked what the numbers are lately but like 70 percent of their investors are retail, which is an insane amount of investors. So it's like, yeah, you get these companies that are very rare that buck the trend. But then again, Elon has bucked the trend before. So it just makes for an interesting thing to think about. We all look at stocks and I know every stock that I'm bullish on, I think it's the exception to the rule.

24:09but i would never i would never want to bet against spacex i'll say that right so i'm googling it the average so and this is google it says the average retail investor for a stock is 20 to 25 percent okay and 35 is considered high okay why what would it make what would it take to get you to buy tesla just out of curiosity to buy a tesla uh probably just like a decent valuation it is expensive right now yeah that's very have you driven one yet a tesla yeah i've driven one i mean the car like don't get me wrong i love the tech of the electric vehicles i think it is super neat um but i have driven a jeep since i turned 18 uh and i i still own that jeep today it has hundred and seventy four thousand miles on it i bought it in 2001 um it's my baby i love that thing um it's old it looks like crap but it's awesome and then i've owned other jeeps throughout my my life um and so i'm just used to to to a jeep i'm used to the turn radius i'm used to sitting up off the ground i'm used to all that stuff and sitting in a car just drives me being that low to the ground drives me nuts i know that probably sounds stupid but i i don't know it's just the way it is like like sitting up off the ground to me is always it's just it feels weird when i'm not sitting up off the ground so um i can't own a tesla but i do think the technology is just crazy crazy crazy cool um and if i were to buy a car

26:19um you know like if when it comes time to buy my wife a new car she doesn't really like them she says they look like spaceships but um if she if she's down when we buy her a new car i totally would be happy buying the tesla yeah uh side note send steven some duck emojis because that this is absolute favorite thing about owning a jeep no it's not it's so dumb and if anybody knows if any of our listeners drive jeeps and you know where the duck thing started please let me know so we can like boycott that person like it may like it's so stupid it drives me nuts and what makes me even i don't know if i told you this my wife thinks it's the coolest thing like that's Oh, yeah.

27:06The only thing about Jeeps that she loves are the stupid ducks. And so now I have ducks strewn across my freaking dashboard because she thinks it's fun to go duck Jeeps. And then when other Jeeps see my Jeep with a duck in it, they're like, oh, and so I'll walk up and I'll have a duck stuffed in on my hood or in my door handle. And it's like stupid ducks. So she started that. She started that. And now you've had like five times the amount of duck interactions. Yes. Yes. 100%. That's great. And it's great. Like the gas stations, I don't know if you've ever noticed, like gas stations sell them now.

27:48And so like every time we go to a gas station, she'll find the ducks and see if they have any cool ducks that we don't have or haven't had. And it's just, I mean, I don't know who makes rubber ducks, but good on you for like. like you found a model and hey let's go after the jeep jeepers because they're suckers for a good trend and it's so frustrating man i can rant about those stupid ducks and just how annoying it is but and my neighbor my neighbor was horrible like for a month straight every morning i would go out to my jeep and i'd have a new duck on it it's like so i just yeah it's so fresh stop touching my jeep people anyway um but yeah so oh and side note i uh i was driving yesterday uh to the mall and they're building a wall wall close to me oh that's exciting i don't know i've never actually been to one I don't think but they are deaf like they've true to my knowledge Wawa's traditionally been east coast right and they're making it midwest now so that's interesting well they have a coffee bar but I think you and Evan would probably stick your nose up at it so maybe you won't like it the coffee bar yeah it's like a self-serve coffee bar like just different types of coffee you can try.

29:24I mean, you would probably just be better off going and pulling your oil plug out of your engine and drinking some of that. Oh, man. Gas station coffee is gross. Hey, man. To me, their coffee's decent. But anyway, back on topic. so i i guess since we've talked about like why a company gets on the the stock market to begin with why they ipo i guess the net next logical question i have andrew is what does the life cycle of a company look like so they ipo they get in the market they they share sell their ipo shares now now they're getting uh all this influx of cash well what does that life cycle look like yeah this is something i wish i learned in day one and it took me too long to learn it because then it really explains why companies do what they do why investors look at stocks the way they look at them and um just kind of help set the table so shout out to brian ferraldi he's taught a lot about this topic but basically you have like five different stages so IPOs obviously the birth and then you have this ultra high growth phase and then you have a second growth phase which is not as cash burning you know we're we're not like SpaceX trying to go from 10 rockets to 20 rockets maybe you were now more growing more sustainably if that makes sense and then there's like a a maturing uh so there's like a maturing life cycle and then right before that's kind of like the sweet spot that a lot of investors myself included like to target where um not only are you sustaining your growth but you're also starting to hit profitability and then you have the the maturing side which is a lot of the big businesses that we think of when we think of blue chip stocks you know Pepsi, Home Depot these companies that are not necessarily growing like they used to but they're just like pumping out cash flow and they don't have to do much to do it they just keep it open they pay a lot of dividends so that's mature and then the last stage is kind of like your decline stage and obviously we all try to avoid that but that's like your big lots or you know these places that are starting to shut down locations and shrinking and things like that.

32:06So those would be the five different phases. And what I also found is interesting based on the life cycles is the amount of success you see in those places depends on the life cycle. So I know I've used this metaphor before. Maybe it's a stupid one, but if you look at like the beginning of a forest, if we can just imagine what that would look like there's going to be a lot of different plants trees grass weeds all competing to to get to higher shade or whatever you would call it and so the probability of of reaching that higher shade is low and then once you kind of hit that higher level of dominance it's easier for those to continue growing and i think i think there's a lot of similarities like that in the stock market too.

33:01It varies depending on the industry. Like I said, some industries are winner take all like you see in tech, but some of them are like restaurants where it's just so fragmented. People have such exquisite taste, if you want to call it that, but we were just all, we all like our chili cheese fries or not. So it's all just a difference in the type of industry, what the business is. And it really has an impact on how well investors do. at the end of the day. We have the inside scoop on something that's absolutely taken over the internet by storm. Live shopping on Whatnot is exploding. I've seen the shows firsthand.

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35:46They're just burning capital as fast as they can get it versus that second growth stage where, like you said, I like how you said it, it's sustained. And if you've ever gone skydiving, you know the massive difference between a free fall and a controlled fall.

36:07So, and that's kind of the way I, when you said, made that analogy, That's instantly what I went to is they're in a very controlled climb and not a fall. But yeah, so can you talk about how we can tell what stage they're in? Yeah, that's an excellent question. So it's actually you can actually look at the financial statements. You can look at the cash flow statement and it really comes down to how are they generating their cash or favor metric, right? Cash generation. But basically, IPO is a perfect example of you're not generating cash from your business, you're raising the capital. So companies continue to do that.

36:53And for as long as they're primarily raising capital, and that could be through debt or it could be through selling more shares, a lot of ways that it's popular now is convertible debt. So basically I'm going to lend you$700 million. And if your stock goes to 200, I get stock shares. So the debt, the people who are lending the debt also get some upside. It's like a free call option. That's very, very popular. And then once you get to that stage where you are no longer raising a ton, like you're actually generating it from inside the business and then plowing whatever profits you're making from the business from those cash operations plowing those back into your business then you're more in the sustainable growth stage love it and so when it comes from a dividend or buyback person obviously if if they're in a rapid growth stage they're not going to be issuing buybacks or at least I don't think they would I could be wrong yes not much like sometimes to offset dilution sometimes not but yeah it's not much in the grand scheme of things yeah gotcha and so whenever so there are there are not doing that but can can we sometimes see dividends from from those stocks or just typically no.