Thinking about listing and an IPO two-three years down the line is certainly not an easy task. The journey can be brutal.
So why go for it?
There’s no doubt that there are many benefits, but the main driver is a sense of pride over pain. This feeling of pride is what pushes a company to go public, which in itself brings many gains in one go – unlocking value, capital raise, exit for early-stage investors, better public image, better branding, better governance, better media attention, talent attraction and retention through ESOPs, potential M&A opportunities as swap ratios become clearer, and further raise of future capital including debt etc.
An IPO journey cannot be successful if pain supersedes pride. Issuing shares is like issuing currency. Listing is not a finance event; it's a trust-building exercise – in governance, disclosures and the company's story.
It’s all about going deeper into the culture, discipline, systems, processes and truth before going to public!
After listing, most of the companies behave very responsibly and prudently about their operations, numbers, governance, etc. I strongly believe this rigour is always required, even before listing. Without this rigour, listing will always remain a dream.
Any company thinking of listing in the future must start comporting like a listed company as early as possible. They should have robust operational rigour, technology orientation, progressive financial results and good frameworks around controls, compliance, processes, governance, branding, passionate people, etc. It should know the levers of value creation and understand the risks that can extinguish value. All decisions need to revolve around activating these levers and mitigating these risks.
For going public from a market perspective, certain foundations are non-negotiable:
- Quality and trustworthy founders, promoters, management and board: This is the biggest non-negotiable.
- Proven and scalable business model, products and services and technology orientation: Past track record of revenue growth and profitability, and the future conviction to revenue, profitability and cash flow are pivotal.
- No major and obvious threats or risks to the business: Although there is no business without risks, the thought process of the company around risk mitigation and how risks have been managed and mitigated in the past should be made very clear to the market and potential investors. This gives confidence to the market and investors.
- High governance standards and controls & compliance frameworks: A clean company image, no significant pending legal cases, clean audit reports of the past, appointment of reputed internal and statutory auditors are important. We have seen many examples in the recent past where sold listed entities have vanished due to bad governance.
The IPO journey and planning is also a big cultural shift and a mindset change. Companies should start following the compliances, rules and regulations applicable to listed companies, much before their listing, to the extent possible.
In fact, they should start doing so at least two-three years prior to the listing and actual IPO work. This greatly helps in post-listing compliances and makes the entire post-listing journey quite smooth. Few examples include board composition, independent directors and board committees’ structures similar to listed companies, quarterly limited review and board meetings within 45 days, robust financial reporting and systems, controls/compliance frameworks, RPTs governance, policy around identifying material events, anti-bribery policies, POSHCA policies, whistle-blower policy, process around handling and sharing the UPSI, ESG focus, etc. This list can be much longer. Having said, these changes require a big cultural shift in the company. Basically, there are no shortcuts here.
Another critical factor is the timing of the IPO.
When to hit the market?
There is no right or wrong answer to this. This is based on market conditions versus company’s readiness. Market conditions reflect macro-trends, sectoral momentum, geo-political risks, investors’ sentiment, liquidity, etc. Company’s readiness is about proven business models, scalability, consistency in financial results, required governance standards, etc. Both are crucial.
Rushing an IPO in a “hot market” without readiness is risky and can expose a company post listing if it does not deliver as guided in roadshows or during earning calls. At the same time, the company can miss the opportunity if it waits too long for favourable market conditions and higher valuations. Here, one needs to follow an optimum approach.
In my experience, timely listing is important even if it happens in a bad market at a slightly lower valuation.
If a company is ready and fundamentally strong then some trade-offs on valuation under bad market conditions make sense.
Ultimately, the company will show results and expected valuation will increase as market conditions improve. Higher valuation expectations stemming from over-optimism around future strategy, business plans and financial numbers may delay the IPO and listing process.
Being optimistic is good, but it should be layered with caution and valuation expectations should factor in major risks. The founders and the board should strive for optimum valuation so that there’s also value and growth left for the new shareholders. This mindset helps hitting the market even in bad weather. This is certainly a tricky decision as it impacts dilution for the existing investors and money in pocket for the outgoing investors.
Once a company focuses and delivers on the above foundations, it can get into the real action of starting the IPO work, a fascinating journey of 8-12 months.
(Vipul previously served as CFO at Ecom Express, ICRA (Moody’s) and Jubilant Energy.)
(We will publish part 2 of this series next Wednesday)
