“An IPO is like a negotiated transaction: the seller chooses when to come public and it's unlikely to be a time that's favourable to you.”
Due to this superfast digitalization trend, the start-up ecosystem and already existing companies seem to be on a growth trajectory, despite COVID-19 slowing business down a bunch. With companies like boAt going for a 2000 crore IPO and LIC probably being around 70,000 crores, what can organizations be ready to go public?
Exits via an IPO has become an attractive prospect, which saw 3.8x growth on Y-o-Y in 2021, compared to 2020, in terms of deal value and 5.8x growth in terms of deal activity when compared to the same period.IPO exits witnessed a five year high in both deal value and deal volume at 29 deals and $4.52 billion exit value.
The year also saw a surge in IPO deals, which can be attributed to SEBI, which has modified the structure of key committees required for a public company. SEBI has made it easier for major issuers to meet minimum public offer and public shareholding requirements and strengthened the importance of independent directors.
Raising capital via public listing has enabled exits for private companies such as FSN E-Commerce Ventures Ltd. (Nykaa) and Zomato Ltd., as a superior route for a strategic alternative for funding expansion and accessing deep reservoirs of liquidity. In terms of the issue size, One 97 Communications Ltd. (Paytm) was the largest IPO in 2021. As these tech behemoths have developed tremendously over the years, IPO exit activity has increased. More tech businesses have a constructed market and have scaled to the point of going public. The present frenzy of IPOs has a powerful cascading effect, as early investors have received substantial money when they exit, which can be re-invested for the next round of potential firms.
In 2021, companies going through a public issue have raised capital via a combination of new issues and Offer for sale, paving way for more PE-backed organizations to follow the IPO exit route. Similarly, following a surge in worldwide IPO activity in recent months, Indian markets too have continued to rise to record highs. With several companies seeking an IPO, the strong momentum appears to be continuing, with cross-border engagement increasing. The surge will result in new-age companies joining the IPO market and charting a new trajectory for expansion. But what should these new-age companies keep in mind?
The first thing organizations should think about is whether their IPO would even be feasible. They have to determine whether the market is big enough, how quickly they can grow because as long as there is money in the market, one’s company has room to grow. Organizations also have to consider how disruptive their products and services are. Disruption is the key to standing out and being an aberration to the status quo, as we’ve seen in the course of this pandemic. Companies also need to sit down and chart out their business model to determine how they’d do in the coming quarters. Investors in the public market favour predictable earnings and if there is ample proof an organization would succeed, they’d invest. Organizations also need to determine their economic moats and how much leverage they have in a competitive market and what their USP is, because by understanding what competitive advantages they have, they’re able to carve out a much more successful path. Organizations also need to find out if the timing is right. They need to go public in a favourable climate that provides enough yield for them. This is a stepping stone to success, but it’s also important that companies have milestones to meet, because if they fail to be consistent, they would not be successful in the public market. The potential for profit makes shareholders understand why the company is valuable. When going public, the management needs to be ready for much more public scrutiny and more eyeballs. Even from an equity point of view, founders should be prepared to know that their equity interest and voting interest would be lowered, as well as management decisions.
The zeitgeist now is going public and while there has been some success, companies need to beware and not just jump on the bandwagon, they need to make sure that their company can sustain itself publicly. An IPO is daunting, all organizations can do is hope it meets their long-term goals. To understand how companies can go the distance, VCCircle presents "Leapfrogging The Way: Companies Going Public", a series of thought-provoking sessions to handhold organizations attempting to get a listing.