Initial Public Offering – Dutch Uncles

Decoding Public Offering – Pre-IPO, IPO, Listing

Aakash Sharma — Mon, 06 Sep 2021 11:35:11 +0000

Today, companies view the public offering as one of the most effective ways to raise funds and plan an exit strategy. Established companies go public to raise large sums of money to fund their expansion plans, and start-ups that have built their brand to the limit see this as a good exit strategy.

However, a firm has to go through many nuances of the public offering process and numerous phases before going public. Let’s see what they are.

Pre-IPO (Pre-initial Public Offering)

Pre-IPO is a stage for a company when it puts shares up for private sale as a last measure to raise capital before it goes public. By introducing more funds, the private company adopts a matured outlook and prepares itself better for going public.

Pre-IPO shares can only be bought by professional investors, high net worth individuals, venture capitalists, private companies, and corporate insiders such as company founders and employees.

Investors invest in private companies a few months or one year before the IPO registration in the pre-IPO phase. This also means that the more significant risks are associated with pre-IPO transactions than with actual IPOs.

Moreover, it is not easy to objectively estimate the value of shares at the pre-IPO stage because a privately held company, unlike a public one, does not disclose financial statements.

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Companies in the pre-IPO stage are not required to provide investors with financial information or corporate rights.

Disadvantages of Pre-IPO over IPO

There are risks and downsides to investing in pre-IPO stocks that you should understand. As investors cannot access information about the company’s trades, including financial statements, pitch deck, or final business plans, they take a high risk of indulging in this investment stage. There is a lack of transparency and openness in the private market.

Initial Public Offering (IPO)

The Initial Public Offering (IPO) is a public issuance in which the shares of a company are sold to investors on a stock exchange. The IPO of a company is usually supported by one or more bank investors and a stock manager who arranges for the shares listed on stock exchanges. The process is commonly known as going public or floating. Following the IPO announcement, a private company becomes a public company.

With the IPO finalised, the company’s shares are issued and traded on the stock exchanges, also called the free market. While the offering offers several benefits, there are also significant costs, especially those related to the system, such as security, banking and legal fees.

Listing

A listing (of a company) refers to the company’s shares being on the list of legitimately traded stocks on a stock exchange. Usually, the issuing company is the one that applies for a listing. Company stocks whose market value and turnover fall below critical levels are often delisted by a stock exchange. Delisting can also result from a takeover or a merger of a company going private.

Each stock exchange has its requirements for a company’s listing, which include:

Annual financial reports for recent years,
Offering investor benefits at a fraction of the outstanding charges, and
An approved prospectus including opinions from independent assessors.

The Bombay Stock Exchange (BSE), for example, requires a minimum market capitalisation of Rs. 25 core and minimum public float equivalent to Rs. 10 crore for a company to be listed on it.

So, this is the basic know-how of the public offering process of companies. Before you start investing, start by analysing stocks and shares based on their IPO history and other financial proofs of stability.

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What are the steps a start-up must traverse in the IPO process?

Bhuvana Rajaram — Fri, 16 Apr 2021 10:35:03 +0000

While the coworking unicorn start up WeWork Initial Public Offering (IPO) debacle of August 2019 is fresh in the minds of start -up founders, it has also made them watchful and wary now. In a dramatic turn of events, WeWork brought down its valuation from a whopping $47 billion to a paltry $10 billion and removed its maverick CEO, Adam Neumann.

The global start up economy contributing to a behemoth $3 trillion in value has been tossed about during the pandemic crisis with a severe drop in VC funding and consumer appetite, leading to several closures and layoffs. It is common knowledge that start-ups in the Travel and Tourism and Automotive industries have taken a severe beating while Technology start-ups have manged to keep their heads above water.

The flip side is that the start-up sector is still eyeing the IPO as a coming-of-age sign in their growth trajectory. Many are making a beeline to the Wall Street, very recently Airbnb made waves with raising $3.7 billion after it priced at $68 per share. Digital transformation has been the game changer catapulting many start-ups focusing on cloud computing, analytics an artificial intelligence to float for IPO.

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The flip side is that the start-up sector is still eyeing the IPO as a coming-of-age sign in their growth trajectory.

Why should start-ups go in for an IPO?

Apart from raising the obvious ‘capital’ for the enterprise, seeking an IPO establishes fairly and squarely its merit worthiness. If you are a start-up operating with a long-term vision, it affords you cash flow, liquidity, employee shares, investors to exit and overall stature increases manifold. And one of the other key elements here, is the market exposure, because once public, the chances of expansion is more likely with people from across the globe finding and investing in you. And this is a fillip for the start-up brand. The rigour involved in getting listed can be enormous making the start-ups not just be satisfied in projecting numbers but also be rooted in firm – market and business fundamentals along with differentiated business models with high margins. Not to say that once publicly listed, there will be a loss of autonomy, perennial pressure for performance, mandatory compliance requirements, nevertheless, it is a dream moment for every start-up to cement their position in the world of business.

What are the 3 keys that tell you that your business is ready for an IPO?

The Core of Your Business

The very fact that you have a dependable product/service, you have the best team to continually improve it, you have the customer problem in the central, and you go all out to provide lasting solutions for this – is what will make you tick in the public eye. It can be tempting to put some quick runs on the board and resort to short term growth strategies, but public opinion resides on slow and steady, and in start-ups being a consistent performer with an enviable track record. As a start-up knowing this core, staying true to it, ensuring that this is driving every expansion tentacle is the first key that will demonstrate your readiness to go public.

The Agility of Your Business

Business decisions will play a humongous role, either it is playing pivot to change directions, or diversifying quickly into related areas, or entering new geographies to expand, or bringing in the requisite specialized talent, or deploying the necessary technologies to scale, a sharp business acumen to be on top of the game is crucial in your journey towards IPO. Start-ups will need to double or triple business volume in two to three years, so determine that goal and work towards it to make strategic moves that take you towards it. As a start-up your immense business knowhow and adaptability to market dynamics and customer demands will be the next key that will show you in unequivocal terms your readiness to go public.

The Reliability of Your Business

When you are in a pre – IPO state there are many things that you are expected to do. Simply because the public is not satisfied with one of your hallmarks, they want you to be hot, leading the race, gathering momentum, rolling out cool products, partnering with reputed names in the industry and so on. So, you must earn their trust, and through it all be original and genuine. It could be giving back to the society, or standing up for your employees, or connecting with employee families, little acts can do wonders to establish you as a trusted and reputed start-up in their mind. As a start-up your brand persona is being built every second and this the third key that puts you on the path to IPO.
The above keys are interrelated and act as cornerstones in providing you an honest report on your eligibility criteria to go public. And gives you a chance to insulate your start-up from the market dynamics that you cannot control.

What are the tenets that prepares you for an IPO?

The run up to the IPO can be laborious and long drawn process that can quash the groundswell of enthusiasm of any start-up, but if a plan is ready with the right team – then it becomes a largely a doable accomplishment. And what exactly makes this doable?

Financials form the fulcrum of this trek up, getting a trusted committee in place replete with specialists spanning risk, finance, audit, legal, taxation and regulatory body, banking, underwriting will be the first and foremost activity that a start-up should undertake. And this is a committee that has a significant exposure to IPO guidelines and must have experience in handling large scale IPO deals and clearly steer the start-up in the direction of going public.
Technology will be the next step that aid the reporting of financials. Large amounts of data, history, present and predictions will have to be dynamically generated. Manual reporting, Excel spreadsheets and simple data analysis is not only not scalable but is prone to error and drags the process. Smart use of technology that integrates quickly with other systems and can dynamically populate data dashboards for analysis will be the need of the hour.
Process rigour internally can be instrumental in assuring a clean house. Regular auditing, controls and checks must be implemented and conducted based on a set cadence. This will unearth financial irregularities and enable a quick course correction instead of a massive financial quagmire later.
Transparency is another pivotal piece in the IPO pie. Conducting frequent roadshows to meet investors, analysts, bankers and sharing start-up financials establishes credit worthiness. Honest and frank reporting on earnings, cash flows and outlook can turn out to make the start-up be seen favourably in the public eye. The start-up needs to be perceived as an entity in control of the affairs with access to large acquisitions that will open avenues for cash. And this will ensure that as a public company you can swim in deeper seas and not just in safe shallow waters.
Risk is another force that the start-up will have to mitigate. Insider trading, false representations, misrepresentation of financial data, employee speaking out of turn and fraud are some of the risks involved. Start-ups will need to address these litigation hurdles and be prepared to fix them and ensure quick corrective measures so that they don’t dent the start-up image. Also, as a public company it is more exposed to market volatility and the public will not hesitate to jump out and board another bus. So, preparedness to handle sudden and abrupt plunge in stock prices is paramount.
Timing can make or break a successful IPO. While start-ups may have all the above in perfect order, if they miss to market watch and roll out the IPO when the market is not bullish it will lead to aborted or unsuccessful IPOs. So, working with analysts and experts and assessing the market and launching when the demand is high with public in full support can make the journey seamless.

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As a start-up knowing this core, staying true to it, ensuring that this is driving every expansion tentacle is the first key that will demonstrate your readiness to go public.

What exactly steps should a start-up take to go public?

The below list comprises milestones that lead up to the IPO and once public.

Have you selected an investment bank associated with the regulatory body? They collaborate with the start-up to provide underwriting services in issuing the IPO. Careful selection based on reputation, network, expertise will be helpful in staring on the right note.
Have you methodically scoured through the due diligence paperwork that the underwriter draws up, ensuring the clauses and contracts are accurately documented?
Have you partnered with the underwriter to conduct roadshows to glean information on the demand to prepare number of shares to offer?
Are you ready to Go Live after ensuring the above aspects are ticked off along with the under writer to launch the shares in the market?
Have you monitored and used wisely the period following the listing where there are no rules determining the price?
Finally enter the market, after which it is only the market conditions and the start-up performance that ascertains the share price.

The IPO Floats from around the world

Global

Some of the recently concluded and much anticipated IPOs of 2021 globally are Compass, UiPath, AppLovin, Joann, Thoughtspot, Rivian, Coursera, Instacart, Robinhood, Databricks, Nextdoor and Ascencus.

Europe

While Silicon Valley has hogged the limelight in start-ups venturing ahead with IPO, in Europe start-ups looking to be listed are Moonpig, Deliveroo, Transferwise, WorldRemit, Draktrace, Music Magpie Trustly, Kahoot, Trustpilot, Truecaller, Epidemic Sound and Valuer.

China

In China, a large crop of start-ups went public in 2020, and the pace seems to be only growing with Megvii, Yitu Technology, CloudWalk Technology, and talks of ByteDance’s Douyin and Toutiao and Didi Chuxing making the foray as well.

Russia

Signs are encouraging with several companies filing for IPO and expecting to raise $10 billion. A gold mining organization GV Gold, recently announced plans for an IPO, while the Russian eCommerce firm Ozon was listed on Nasdaq in November 2020.

Middle East

As for Middle East, Saudi Arabia leaped ahead with a spate of IPOs such as Dr Sulaiman Al Habib’s $700m IPO, Amlak International, BinDawood Holding and the gargantuan Aramco. And UAE is likely to go public with MAG Development and Seafood Souq General Trading.

Done right, start-ups can make it to the big league with an IPO, however, that can be the start of another major journey. And here, the responsibility of conducting business operations as a public company is steep and start-up owners need to be cognizant of this expectation.

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Why 47% of Start-ups Consider IPO as a Good Exit Strategy

Aakash Sharma — Mon, 22 Feb 2021 12:35:05 +0000

There comes a time for mature and established start-ups when it is no longer possible to raise more capital from VCs or private equity firms. And they start weighing their options on the street. Well, according to a recent survey, nearly fifty percent of start-ups think going public, i.e., IPO, is a good exit strategy for start-ups.

What is an IPO?

An initial public offering or an IPO occurs when a start-up offers a certain number of its shares for public sale. Following a valuation process, the stakes are listed on the stock exchange at a price determined by the start-up. Once the shares enter the market at the trading price, they are traded freely on the stock exchange.

The listing decision means that the market determines the shares’ price, and the founders and investors holding the shares lose direct control over the initial value. If successful, the company will have significant capital and liquidity. In the event of failure of the IPO, the paid-up capital account or additional paid-up capital will not increase above the face value.

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Improving the finance unit and talent management seems to be a priority for start-ups in the future.

Why are start-ups going for IPO?

The start-up ecosystem is emerging with an exciting trend as more and more companies are launching IPOs. This is a direct result of a large amount of capital in the start-up market by entrepreneurs, private companies and other investment institutions.

With the pandemic underscoring the power of the public market and the importance of a healthy single economy, start-ups are seeing IPOs as a potentially profitable product for their investors.

47% of start-up founders, surveyed by InnoVen Capital as part of their founders’ annual review, stated that the IPO is a realistic exit scenario for them, compared with 43% in the previous year and 39% in 2019.

Pandemic changed the IPO game

The financial architecture of many start-ups improved during the first period of the COVID-19 setback. But for this trend to grow upwards, the sentiment of public procurement and India’s markets will have to be favourable for high growth, comparatively low-profit companies.

In the InnoVen Capital survey, respondents from the logistics industry were the fastest to hold an IPO in India, with almost 83% saying they preferred the route. Zomato, Nykaa, PolicyBazaar, Delhivery, Freshworks and others are some advanced Indian technology companies considering an IPO in India or abroad over the next two to three years.

As growth and customer demand continue to be at the heart of Indian start-ups, more and more companies are shifting their focus on breaking even. With more focused on profitability, they are running on the right track to make earnings and assets profitable in the future.

Improving the finance unit and talent management seems to be a priority for start-ups in the future. They have also experienced a significant recovery after the nationwide shutdown due to COVID-19. While most companies in e-commerce, logistics, B2B platforms, enterprise software and D2C segments are coming out on top and attaining their pre-COVID business, many are still catching up.

But one thing that seems to be on a high note is that IPO is looking like one of the favourite exit options for many start-ups, old and new alike.

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