When Startups Go Public: The Journey to an IPO

Every entrepreneur hopes that one day their startup will achieve the monumental success of going public through an Initial Public Offering (IPO). However, this dream is not always realized. Not every company chooses to go public, as there are various funding sources available. Additionally, only a small percentage of startups that do go public end up trading at or above their IPO price, with around 70% trading below it.

Criteria for an IPO: Goodwill and Funds

A startup can only consider an IPO if they have established a strong reputation and built sufficient goodwill in the market. Without these credentials, no investor would want to invest, leading to a potentially catastrophic outcome for the company. Furthermore, raising funds through the equity market can be expensive due to flotation and other costs. Therefore, if a startup already possesses good brand recognition and has managed to create a sustainable business model, it can proceed with an IPO. Otherwise, it will need to explore other funding options.

Business Expansion and Investor Exit

There are multiple motivations behind a startup seeking an IPO. Some key reasons include the need for additional capital to expand the business and a desire to provide an exit for existing investors.

Firstly, a startup might pursue an IPO to secure the necessary capital for market expansion after it has developed a solid business model and market reputation. This is evident in the example of Zomato, which is simultaneously raising funds for growth and allowing its existing investor, Info Edge, to sell shares worth 750 crore (INR 750 crore).

Another reason is when existing investors want to exit their stakes in the startup. In Paytm's recent IPO proposal, the board has approved the issuance of shares, which will total approximately 16,600 crore INR (INR 16600 crore). Out of this, 8300 crore INR (INR 8300 crore) will be offered for sale to existing shareholders (OFS), allowing them to reduce their shareholdings, while the remaining 8300 crore INR (INR 8300 crore) will be used for the company's business growth.

Conclusion: A Strategic Decision

The decision to go public through an IPO is a significant strategic choice that requires careful consideration. Startups must ensure they have the right reputation, market position, and business model to make this journey successful. Whether driven by the need for expansion, the desire for an exit, or a combination of both, a startup's IPO can be a transformative event in its journey to becoming a publicly traded company.

Keywords: IPO, startup expansion, public funding