Reasons for Startup IPOs

Reasons for Startup IPOs

The stock market today is more like an IPO market. The surge of IPOs was unprecedented last year. With the stories of most startups, after a short while of success, turning on its heels and running to go public, come tales of the owners of these startups. There have been stories of tears welling up in the eyes of startup owners when their small privately-held companies go public. This was exactly the case last winter. 

Billionaire Vijay Shekhar Sharma suddenly broke into a flood of tears while launching the Paytm IPO at the Bombay Stock Exchange. The thing that was most valuable for this Fintech founder was the ultimate destination of Dalal Street. Although several startup successes such as Zerodha and Zoho opt to stay chained to their beloved creations, many unicorns want to venture into the domain of the upcoming IPO. If these startups haven’t launched IPOs yet, they’re probably just waiting for the right moment to start. 

Why Go Into “IPO Territory”?

Many startups today see success early. So if they are so successful, why do entrepreneurs put themselves through the public markets and the stock market today, ruthless places by any description? Everyone knows how the market can turn on its head. So, the question arises, do startups just want to raise more money as VCs are pulling out, or do they wish to get into public markets because they believe that this is a path to future growth? 

When you open a demat account to trade in the stock market today, you have to do some due diligence before investing in a particular company stock. You may just select a certain startup that’s just gone public and got listed on the exchange. But are you sure that this will be a good investment? You have to find out why startups are rushing to announce IPOs in the first place. 

Startups and IPOs

Recently, the co-founder of Delhivery, and its current CEO, Sahil Barua, wrote a revealing book. The title of the book suggests the ways that startups commonly carve their path to the IPO list soon. “Startup Compass” is a book that tells you that when a startup goes public, it does subject a new company to market vagaries, but it is a good way to raise capital. Furthermore, it is frequently much easier to attract a large pool of investors from public markets than from a niche of private investors. The book is a wonderful expression of stories of some of the most important startups that grew and prospered in the last ten years. 

 Advantages of IPOs for Startups 

If a private startup decides to become an upcoming IPO, there are many advantages to be had. These translate into reasons why startups may go the IPO route. Here are the reasons why startups may consider releasing an initial public offering: 

  • Large Pool of Capital - The greatest advantage that startups get from becoming  listed, according to some startup owners, is the convenient access to a substantially large, almost inexhaustible capital pool. From the point of view of startup companies, this eliminates one of the most crucial external limitations that any company, not just a startup, could possibly have. Public funding is done on a larger scale and takes centre stage while private funding takes a backseat. 
  • Easy to Borrow - A pathway to Dalal Street facilitates a startup to raise debt. You should be aware that it is simpler for companies to get lenders to have faith in them if they get listed. Lenders go out of their way to generate funding for startups once they’re on an exchange. It is a challenge to raise enough financing from any private investor as companies grow and become bigger. Moreover, if you are a seasoned investor in the stock market today, you would know that a company listing entails that your financial background is made public and seeing is believing for some investors. If any company stock is out there in the open, anyone can gauge the apparent success of the company. 
  • Ownership Diversity - When a company goes public, a diversity in ownership is established. The company, as a result of being on an exchange, becomes free of being under the control of a small group of investors. In the public markets, the company is exposed to investors from a wide range of backgrounds and domains. In terms of the size of investment, there is also broader scope. When ownership of a company is distributed, there is some protection to be had as just a few investors do not take positions. Rather, investment is more balanced out and spread. 
  • Positively Viewed - Any upcoming IPO is viewed as positive from the public consumer’s point of view, and from the view of the company too. Investors receive a powerful signal, showing that a company is willing to go public, being responsible to potential shareholders, generating finances that are publicly available, offering up books to be audited by SEBI, and keeping a constant check on trading activity of the company. These are all good things to keep up the faith of the investor and the credibility of the startup. 
  • Creation of Value - Listing a startup also helps to create value for its employees through the means of stock options. The prospect of gaining an appreciation in stock prices,  makes the startup company appealing and attractive to prospective and potential  employees.
  • Ease in Acquisitions/ Takeovers - Finally, a public listing in the stock market today permits ease in any future mergers and also in acquisitions. Being a company with stocks on offer, stock can be bought and sold in a merger or takeover. In terms of a privately-held company, mergers and takeovers become complicated and are hard to pursue.

Startup IPOs can Start Investments

With any upcoming IPO of a startup, you can gain a lot as an investor. Furthermore, now that you can grasp why going in for an IPO is good for a startup, you may think of allocating your capital to a startup IPO. These days, you can invest in a number of startups that are going in for public listing. What’s more, you do not have to open a demat account to subscribe to an IPO. Something to always be mindful of, whether you invest in a startup or an established company IPO, is to do your background work well before you position your funds. 

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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