Outlook of the investor community and investor appetite for matured start-ups has undergone a major shift, especially for the technology led business models that have scaled tremendously, including during the crisis period, and have emerged as formidable business models that now generate both profitability and growth in tandem.
Positive market sentiment with several super successful IPOs of traditional business have led to great buoyancy thereby creating a perfect backdrop for mature start-ups to hasten up their endgame plan for an IPO. Start-ups who have pivoted to become resilient and growth leaders in their segments are likely to be the frontrunners in this journey. Gaming company Nazara has taken the lead and is slated for listing in coming days, its issues having been subscribed a whopping 176 times. The next couple of quarters of 2021 will likely see the Indian unicorns like Zomato, Delhivery, Policybazaar, Nykaa, Ola, Byjus etc to follow the path. While there are sub-set platforms on exchanges that permitted start-ups to list, lack of depth on those platforms does not make it relevant. An IPO with a listing on the main board of the exchanges is the holy grail for the Founders.
Going public via an IPO sets the real benchmark of valuation of a start-up. IPOs are aimed not just at attracting retail capital but also for generating liquidity or marketability for existing shareholders including Founders. While investors who backed these entities are eying 2021 as a year of exit, Indian HNI and retail investors who hitherto could not participate in these businesses are awaiting IPOs to become part of their future growth trajectory and value creation.
With ample liquidity and favourable policy regime, start-ups who often migrated offshore to get listed now consider Indian markets to be conducive; with all necessary elements in place for launching an IPO. The grey market premium on shares of IPO bound start-ups, although influenced by sheer lack of supply, among other factors, do suggest a good value unlocking in the making post IPO.
Preparation for IPO involves a great deal of effort, usually requiring between four to six months of high intensity preparations and without taking eyes off the business goals and growth. Founders will need support of experienced teams and advisors through this journey, who can handhold to deliver a collective outcome. IPO bound start-ups usually raise an anchor round from credible investors right before the IPO, to bring in more credibility and validation to their valuation hypothesis.
Successful IPOs will have a cascading impact on the entire start-up ecosystem, encouraging more entrepreneurs in the making and support aspirations of the team who see a real monetisation in value of the ESOP holding. While IPO is merely a liquidity event for investors looking to exit, for the founder and team of the company, it is embarking on a new journey. Founders of IPO bound start-ups should therefore look beyond just a strong debut, the vision should be to become world-leading institutions with greater focus on sustainability, consistent innovation, accountability and succession. The public offering is only the ‘initial’ step or foundation to the ‘ultimate’ institution building journey of a start-up.
(The author is Partner, BDO India LLP. BDO India provides tax, regulatory, accounting, advisory and other services. Views are his own.)