How do you research a startup IPO if there is hardly any historical data?

How do you research a startup IPO if there is hardly any historical data?

Of late, the number of upcoming IPOs in India have risen considerably. An increasing number of companies are now choosing to come forward with public issues of their own in order to raise funds. But then, since Initial Public Offerings are first-time offers from companies including startups, there’s usually not much information about the entity. 

 

In cases like this, how do you go about researching the company seeing as research is an integral part of investing in an IPO? Fortunately, there’s a way for you to get to know more about the company coming out with an IPO. Wondering what it is? Continue reading to find out. 

 

How to research a startup IPO without any historical data? 

A company that is just coming out with its IPO may not always have publicly available data. However, that doesn’t mean that there’s no way for you to obtain it or that you should skip investing in it. 

 

There’s one very important document that all investors interested in investing in an upcoming IPO must absolutely read - the Red Herring Prospectus (RHP), also known as the prospectus. But what is the prospectus? 

 

The prospectus is a voluminous document that every company wanting to issue shares to the public is required to file with the Securities and Exchange Board of India (SEBI). It contains detailed information about the upcoming IPO issue, the company, the promoters, the financials, strengths and weaknesses, and more. It is designed to offer a wealth of information to the investors to enable them to make more informed decisions on whether to invest in the IPO or not. 

 

What should investors focus on when reading a prospectus? 

Now that you know that a prospectus is your gateway to information about a startup offering its IPO, let's take a look at a few of the sections that you should focus on when reading through it. 

 

1. Business Description 

The first thing that you should focus on getting to know about the company when reading its prospectus is its business. The document contains an entire section dedicated to explaining the company’s business model and revenue streams. Reading through this can help you understand what the company is up to and where it earns its revenue from. 

 

Investing in an upcoming IPO of a company without properly understanding its business can put your investment capital in danger. So, this is something that you should give extra attention to when going through a prospectus. 

 

2. Risk Factors 

Just like how there’s a section dedicated to explaining the company’s business, the prospectus will also have a section titled ‘Risk Factors’. This section goes into detail with respect to the various business and financial risks that the company is open to. In addition to that, this section also contains information regarding the kind of impact that these risk factors are likely to have on the company. 

 

Reading through this can help investors gauge the kind of roadblocks that are in front of the company. Getting to know the risks that a company faces is absolutely essential since they can materially disrupt the operations and performance of the entity. 

 

3. Financial Statements

The financial statements of the company are a record of all the assets, liabilities, revenue, and expenses that the entity deals with. Reading through the financial statements can give you a deep insight into the way the company manages its finances. An ideal company should have steady revenue, if not growing year after year. Also, it should have lower liabilities and higher assets.

 

The prospectus will usually contain the financial statements of the preceding 3 financial years. This is usually done to make it easier for investors to compare the financial performance of the company across multiple years. 

 

4. Use of Proceeds 

The prospectus will also have a separate section where the company specifies how it plans to use the proceeds from the IPO. Although this might seem unnecessary, this section can give you an insight into the thought process of the company’s management. 

 

A company that’s selling its shares to the public to raise funds should ideally use it for furthering or expanding its business by creating a new revenue stream or through the purchase of an asset. On the other hand, if you find that a company is planning to use its proceeds to pay off its debts, obligations, and other liabilities, you should exercise caution when planning to invest in its upcoming IPO. 

 

5. Management and their Experience 

The management of a company is its heartline. And so, it is important to get to know who its promoters, directors, and senior management are. In the prospectus, you can find information with regard to the Key Managerial Personnel (KMP) of the company. In addition to giving information about the individuals running the show, you can also find information about their experience and achievements.  

 

A company that’s helmed by individuals who have significant experience in the same field as the entity’s business is ideal. On the other hand, if the company is headed by people who have little to no experience in the business, it may be prudent to stay away from investing in it.  

 

6. Details of the IPO 

And finally, the prospectus also contains details about the upcoming IPO. It includes information such as the number of shares being put up for sale, the amount of funds to be raised, the offering price, the date of opening and closing of the issue, and details of promoters’ selling portions. When reading through this section, look out for signs of the promoters selling a majority of their holding through this IPO. This may be indicative of trouble within the company.  

 

Conclusion

With this, you must now be aware of how to conduct a research on a company which doesn’t have much historical data. Once you’ve read up about the company through its prospectus, you can also compare it with its rivals or peers within its industry. This will give you some much-needed perspective of where the company actually stands. 

 

Now, if you’re an individual who wants to invest in an upcoming IPO, then get in touch with Motilal Oswal immediately. You can open a demat account online within just a few minutes and be on your way to invest in the stock market today.  

Related articles: 5 Tips for Investing In IPOs | What's the big deal about IPOs | Clearing the confusion from IPOs | IPO in India- The future looks bright | Upcoming IPO

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