As predicted by market gurus, 2018 is already seeing a number of internet B2C companies going public, especially in the SME bourse. Ten Indian startups took the IPO route in 2017 -- that’s four more than the 2016 number of six startups that went public, as per CB Insights reports. While funding from venture capitalists are easier and faster to procure for growing companies in need of a financial boost, there are a number of solid reasons why these Indian companies are opting for IPO instead.
Hike in credibility and brand image
Needless to say, going public certainly does a lot in sealing the confidence of customers and potential leads to your brand, because it is understood how stringent the road to IPO is. IPO was, in, and will continue to be the gold standard for corporate governance. When a number of big brands cannot make the cut because of compliance issues and other controversies, but your company can -- it certainly speaks a lot about your levels of transparency and confidence.
Bigger market than one or two investors
While VCs are a quicker route to raise funds, it ties the company to them. Not only does it mean that the investors become more involved, which take away your power in running the company, it could also lead to loss of ownership status and management control if their stake is over 50%. Given such disadvantages, any CEO or promoter would be glad to reach out to a wider market.
Opens up more funding channels
Once your company has been cleared for IPO, it means that it is a well-regulated, compliant and maybe even a bankable business. This then opens up a plethora of options to gather more funds at a later stage, if and when you choose to. These include investment from private equity, follow-on issue, loan at cheaper rates and other such instruments that come into picture once you’re listed. Companies can even go on to file for another IPO in the main bourse after two years.
More liquid equity
One of the most important reasons why going for an IPO is better than VC funding is the equity. While you have to run a tight ship with the latter, IPO ensures you have enough liquid equity to be free to steer your company in the right direction without constraints. For a business looking to expand aggressively, IPO meets your requirements much better than a VC can.
Morale booster
Being listed for IPO means you get the chance to give dividends to employees who have invested their time and effort in the company -- creating a sense of belonging and ownership among them. ESOPs go a long way in boosting the morale of the company’s workforce. Especially for startups, it is one of the best ways to attract and retain talent. Additionally, for such startups, ESOPs with future dates are not only a great replacement for hefty salaries that the company might not be able to afford, but also a great way to ensure long-term commitment.
Busting the myths
Even as IPOs have the above-mentioned advantages over VC funding, there are still a number of misconceptions that entrepreneurs and founders continue to have about going for an IPO. It is important to be absolutely clear about the long-term implications and effects of opting for IPO and thus these myths need to be busted before you start out.
Cashing out
To some, raising funds through IPO means that they could ‘quit while they’re ahead’ and cash out, instead of taking on more pressure. Going public is usually looked at as a way to buy out the early investors, rather than a fund-raising exercise or an opportunity for growth. However, with the small exchange coming up, companies can now shift their perspectives to use this platform for their business expansion instead of seeing it as an exit point for early investors.
Too much paperwork
This is less of a misconception and more of a roadblock that most startups point out when mulling over whether to go public. While it is true that compliance work takes up a lot of work to be cleared for an IPO listing, the rewards far outweigh the efforts.
Compliance and regulations
Just like the abhorrence for excess paperwork, the intimidating task of meeting compliance rules and regulations is another overestimated deterrent for these startups. When you go from a private limited company to becoming a limited company, you have to meet higher compliances. Once you are a listed company, you need to report about company’s forecast, revenue and other updates every 6 months - which are minutely noted by public. There are regulatory requirements of a full-time company secretary and of regular updates on ROC website.
Note: Views are author’s own. Vishwavijay Singh is the co-founder of Salebhai.com, an Ahmedabad based e-commerce platform for regional specialties that include food and products.