The year 2021 was truly the year of startup IPOs, as the likes of Zomato, Nykaa, Paytm, MapmyIndia, among others made quite the splash in the public markets.
But that changed this year as the global markets witnessed a massive slowdown, with only Delhivery and Tracxn going public so far.
Others such as Droom, OYO, boAt, Snapdeal, and PharmEasy reversed their IPO plans as market conditions were not robust.
International tech IPOs too had a very strong downward trend, especially the US which has not seen any internet / tech IPO up till last quarter this year.
However, in spite of difficult conditions, Indian startups have remained vibrant and strong. The macro themes of technology, innovation, and transformation still have strong tailwinds.
And while we wait for the market to bounce back and for the funding spring to begin, the IPO frenzy is surely to reignite among Indian startups.
A panel comprising Vishal Kampani, Non-Executive Vice Chairman, JM Financial Limited and MD, JM Financial Credit Solutions Limited; Sunil Singhania, Founder, Abakkus Asset Manager LLP; and MD Ranganath, Chairman, Catamaran Ventures, came together at TechSparks 2022, to discuss the dos and don’ts of launching an IPO and what founders and startups need to work on to prepare themselves to go public and effectively leverage the public markets to accelerate business growth. The panel discussion was moderated by Sonia Dasgupta, CEO of the Investment Banking Division at JM Financial.
Solid businesses will IPO soon
The current lull in the IPOs in the Indian market according to Vishal, seems very close to the 1999-2000 scenario in the US, where a lot of capital was initially pumped into the market by banks in 1998-99, which created huge amounts of liquidity and hyper valuations. This was followed by a crash in 2000, as the capital was withdrawn over a period, because investors thought that these same companies would be loss making and that the tech party was over. But forwarding that to today, the very companies that slumped in those years are now some of the largest in the world, building best businesses for the future.
“Capital markets are about timing and sometimes the euphoria can make valuations go up. But that does not mean that the companies won’t survive over time. In the tech space I see a repeat of what had happened in the US in the 2000. I have interacted with 30-40 companies and I think it is just a matter of time that capital will be attracted to the sector in the next six months to a year,” Vishal said. He also added that it is important to understand unit economics and for investors to understand when these companies will produce cashflow and he was very bullish with cash flows into the India market both from a domestic and international perspective.
“The domestic sector for investing is very vibrant. India has given $80 billion dollars back in the last 18 months to foreign investors which is a big number. Also with the current geopolitical situation, India will be the highest recipient of global flows in the next couple of years. The IPO party according to me is not over,” Vishal added.
Be prepared to answer questions
When it comes to IPO and especially a tech-IPO, the perspectives of a private market versus a public market investor are very different, said Sunil of Abakkus Asset Manager LLP. As an example, in a public market, companies will have 30,000 investors questioning them, over a private one, where there will be 30 investors asking questions. “Private investors want to build businesses over 8-10 years, while in a public market, investors tend to look at a company’s performance on a quarter on quarter basis. My advice to budding tech entrepreneurs, as far as IPO is concerned, is don’t shoot the gun. Don’t be too early. First build your business, make it sustainable so that it can tackle market swings,” he added.
Unless a business is sure that it doesn’t need capital to survive, it should not jump into an IPO. But if the decision to do an IPO is taken and a business is listed, it also will give the opportunity to raise capital from a wide variety of investors rather than just a handful of private investors. But to do that, one has to be very sure that their business model can sustain without fresh capital being infused. “Be prepared to be more answerable when dealing with public market investors which will also mean a lot of pressure quarter on quarter, along with great opportunities going forward,” Sunil said.
How to better valuations, when going public
According to MD Ranganath, India is one of the three countries globally (the others being China and US) which not only has a large domestic market, but also boasts of a very deep tech talent pool, and this will be a great differentiator in the years to come. “However, valuation should not really be the goal right now. Instead of selling to investors, new businesses or startups should be selling to their own clients. That’s the primary focus,” he said.
Ranganath also shared the story of Infosys when it went to IPO in 1993 and later to NASDAQ in 1999. “The founders knew that they were making a promise to minority shareholders, and finally built a sustainable business model that was not just about the growth and sales multiple, but also about generating cash,” he said. He also outlined the flipsides of an IPO for startups, where predictability is not a core criterion, whereas in a public company revenue and profitability become super important.
Finding the right leader
One of the most important metrics before a company goes in for an IPO is to have the right leader who can steer it to success. A company or a startup in various stages also has different kinds of investors and it also needs different kinds of management help in the company, and different kinds of professionals that help the company to scale. In that context, if the founder is able to professionalise himself and create a professional setup, which allows the company to scale, then he or she is probably best suited to run the company.
But many founders are very creative, they like to create the product, they are apt leaders in the initial stages of the company. But when the company matures, it’s better to hand it over to a professional CEO, who has run large organisations, large scalable businesses, because he brings in that experience for faster scalability of the founders’ vision.
“Vision and execution are two very different things. A combination where the company has a founder on the board, or a founder giving vision and long-term guidance, bringing his experience from the initial years of the company, and a set of professionals, with a leader to scale the company for an IPO would be the right model,” said Vishal.
A founder has to be humble and smart enough to focus on segments he or she is good at and ask for help and get in the right professionals where he or she can play a better role.
Live the life of a public company
All companies go through their journey of interception, having a set of early backers, then entering various funding rounds, followed by a pre-IPO stage. Companies need to ensure that when they enter the public market, they need to be at par with their peers and have a professional board, the right leadership, audit committees, financial committees, etc. “Once a company decides to go for IPO, it should be one or two years before that founders start practising the processes that best public markets follow by taking cue from their discourses in balance sheets, composition of board, investor communication. This will ensure that when a company is finally on the IPO stage, it doesn’t have to reinvent the wheel,” said Sunil.
Another good platform for companies is to attend investor conferences where private companies are invited to meet public investors. That kind of a forum prepares them for the kind of questions public investors ask. “If you are planning an IPO, start behaving like a public company. That will make the transition really smooth,” he added.
Managing risks metrics
The confidence of investors in public listed companies comes with how they fare on the predictability and sustainability of the business. Risk management has many layers to it. It helps to have a team that is diverse in the skills they bring to the table – collectively exhaustive, but mutually exclusive. Another important aspect is process, especially when scaling – be it in financial, hiring, customer relationship and even investor relation process. “At Infosys we followed the simple PSPD model – predictability, sustainability, profitability and de-risking. One of the important factors is that risk management has to really start at the very top. It is not about not taking a risk, but more about how equipped we are to take a risk,” said Ranganath.
Risk management systems are about how one takes risks, manages them, and ensures if everyone on the board and management have visibility of the risks. “At the board level there has to be a scorecard which besides profitability also needs to list out key risk metrics. If that is discussed and shared, the percolation and the attention becomes that much deeper,” he added.
The real motivations of an IPO need to be well thought through as there are a lot of regulator compliances. The journey needs to be well planned and companies need to build a strong foundation, good sustainability practices, good governance framework, concluded Sonia.
“There is always a great market and investors will reward handsomely, if this is followed through,” she added.