An initial public offering (IPO) is the process of a private company becoming publicly traded on a stock exchange. This is referred to as “going public” and allows new investors to purchase shares in the company for the first time, and it is the first step in a private business turning to a public one.
What determines the price of IPO shares, and is it really a fair value? The answer to those questions includes a blend of financial analysis, market variables, and the psychology of the current investors. An understanding of the components that are used in the IPO pricing should help early investors make wiser choices.
How Pre-IPO Shares Are Valued: A Deep Dive
Pre-IPO shares are valued through private, negotiated transactions based on the company’s growth, financial performance, market comparables, and future potential, using methods like discounted cash flow or comparable company analysis. The price is not fixed like listed stocks but determined by a combination of factors such as previous funding rounds, market demand, the overall IPO outlook, and the specific company’s unique business model and financial effectiveness
The Components of IPO Valuation
A successful IPO hinges on consumer demand for the company’s shares. Strong demand for the company will lead to a higher stock price. In addition to the demand for a company’s shares, there are several other factors that determine an IPO valuation, including industry comparables, growth prospects, and the story of a company.
- Market Demand
Strong demand for a company’s shares does not necessarily mean the company is more valuable. However, it does mean that the company will have a higher valuation. An IPO valuation is the process by which an analyst determines the fair value of a company’s shares.
Two identical companies may have very different IPO valuations simply because of the timing of the IPO and market demand. A company will usually only undergo an IPO when it’s determined that demand for its stock is high.
- Industry Comparables
Industry comparables are another aspect of the process of IPO valuation. If the IPO candidate is in a field that has comparable publicly traded companies, the IPO valuation will include a comparison of the valuation multiples being assigned to its competitors. The rationale is that investors will be willing to pay a similar amount for a new entrant into the industry as they are currently paying for existing companies.
- Growth Potential
An IPO valuation depends heavily on the company’s future growth projections. The primary motive behind an IPO is to raise capital to fund further growth. The successful sale of an IPO often depends on the company’s projections and whether or not it can aggressively expand.
- Corporate Narrative
Not all of the factors that make up an IPO valuation are quantitative. A company’s story can be as powerful as a company’s revenue projections. A valuation process may consider whether or not a company is offering a new product or a service that may revolutionize an industry or be on the cutting edge of a new business model.
Example, in the 1990s, several internet pioneers received billion-dollar IPO valuations simply because they were promoting new and exciting technologies, despite having no revenue at the time.
Some companies may embellish their corporate narrative by adding industry veterans and consultants to their payroll, trying to give the appearance of being a growing business with experienced management.
Risks of Investing in IPOs
The objective of an IPO is to sell a pre-determined number of shares at an optimal price. As a result, companies will usually only conduct an IPO when they anticipate that the demand for their shares will be high.
When demand for a company’s stock is favorable, it’s always possible that the hype around a company’s offerings will overshadow its fundamentals. This creates a favorable situation for the company raising capital, but not for the investors who are buying shares.
When investing in an IPO, don’t be swayed by media hype and news coverage. When Groupon, Inc. (GRPN) debuted in January 2011, local couponing services were widely touted as the next trend. On its IPO date, Groupon’s stock opened around $524 (split-adjusted). After that, it sank and kept sinking—in June 2025, it was trading at about $34 per share
How Is the IPO Share Price Decided?
A valuation is given to the company with the input of an investment bank, and that value is then divided by the total number of shares to be issued to arrive at a price per share.
How Do You Know if the IPO Is Undervalued or Overvalued?
Valuing a company is a subjective process. A good starting point would be to analyse the financials it’s required to be disclosed as part of the IPO and objectively review how much of its growth prospects are achievable and how much this would add to earnings. It’s critical here to be skeptical and consider worst-case scenarios.
To get a rough idea of an acceptable range, it can also help to identify if there are similar companies that are already listed and see how they are valued.
Conclusion
Investment banks and company insiders have strong incentives to set an IPO price that maximizes capital raised. That means the IPO price often reflects market hype as much as company fundamentals.
For investors, the best defense is due diligence. Ignore media buzz. Review the numbers. Understand the risks. And always ask whether the future growth is already priced in
We understand that IPO valuations are often a mix of fundamentals and market excitement. While investment banks aim to maximize capital and headlines may amplify the hype, your focus as an investor should always remain on clarity and conviction.
That’s where we come in, helping you cut through the noise, review the real numbers, and assess the risks with confidence. If you’re exploring pre-IPO or IPO opportunities, let’s work together to ensure your decisions are backed by research.
Reach out to our experts at Equentis InvesTech to navigate the IPOs smartly.
