Many Indian start-ups are looking to go for an initial public offer to unlock the future growth capital and funding avenues
In spite of the brouhaha start-ups make over fundraising, an initial public offering (IPO) has not exactly attracted newbie ventures so far.
But this could change, as start-ups may take a cue from Airbnb, Pinterest or Uber which are considering an IPO next year.
IPO has been an exit route for early investors. “If someone wants to raise easy money, it should take the VC route. If it wants to follow a course and comply with industry norms, it should opt for an IPO,’’ says Vishwavijay Singh, co-founder of food marketplace SaleBhai.com, which has gone in for an IPO. Logistics startup Delhivery is also considering an IPO. Singh says an IPO resonates with investors and stakeholders perceive the venture as a well-regulated, compliant and bankable business.
“This then opens up a plethora of options to gather funds at a later stage. These include investments from private equity, follow-on issue, etc, which come into picture once you are listed,’’ says Singh, adding that the funds raised through the IPO will be used “for customer acquisition, enhancing product categorisation and building a seamless customer experience through the platform.”
According to legal expert Debanshu Khettry from law firm Leslie & Khettry, a successful IPO enhances the credibility of the enterprise. “An IPO also means gaining easy access to future growth capital.” Furthermore, the multiples in relation to the valuation that a start-up can achieve from a PE/VC is usually less than what it can achieve with a larger market that an IPO caters to. “This leads to additional capital at a lesser dilution for the start-up,’’ says Khettry, who is also an investor member, Calcutta Angels Network.
It is equally crucial for start-ups to consider when to go public, say experts.
“Predictability of cash flows is a key requirement for any start-up looking to go for an IPO. Most start-ups are quite immature at this. Sustainability of operations and initiatives is also another milestone to be passed before considering an IPO. If both these parameters are well met, then they need to ensure that the management is comfortable with taking on the overhead of compliance and regulatory scrutiny to issue and maintain a public listing, both at the time of offering and later,” says Harsh Shah, co-founder of Fynd.
Khettry adds it is imperative to consider whether the start-up can meet the constant requirements and responsibilities of a listed company. “The start-up should also be in a position to handle the consequences of a failed IPO, or a lower valuation from the market in case it does not achieve the forecasted results or fails to meet expectations,” adds Khettry. Moreover, experts say the IPO market primarily caters to well-established brands and the complexities and compliances are too many.
Khettry feels although platforms exist for the listing of smaller companies (such as BSE SME segment and the NSE Emerge), there isn’t much awareness and will on the part of regulators to make it more attractive. “India needs to develop a market on the lines of London’s AIM Market for IPOs to become popular.”
The Securities and Exchange Board of India (Sebi) is considering allowing start-ups to list their IPOs on a “SnapChat model’’, similar to what the messaging app offered last year during its IPO by issuing shares without any voting rights. “If this happens, it could be a good thing,” feels Sanjeev Bhatia, co-founder of Onlymobiles.com.
Currently, several Indian start-ups are giving an IPO a thought. “Onlymobiles.com will have an IPO. But not in the next 24 months,’’ says Bhatia. Lachhwani says MCaffeine is looking forward to an IPO. “This would unlock the tremendous amount of scale-up potential for the company.”
Shah says Fynd can “definitely’’ look at an IPO in the future. “However, we feel we are still 7-10 years away from that.”
GOING PUBLIC
- It is imperative to consider whether the start-up can meet the constant requirements and responsibilities of a listed firm
- The start-up should also be in a position to handle the consequences of a failed IPO, or a lower valuation
- IPO opens up a plethora of options, including investments from private equity, follow-on issue
- Sebi is considering allowing start-ups to list their IPOs by issuing shares without any voting rights
- Although platforms exist for the listing of smaller companies, there isn’t much awareness
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