Initial Public Offerings (IPO) are a good way for companies to achieve their progressional transition towards better funding. It is a perfect growth strategy depending on your company’s current financial state and its rate of market interaction. However, as with any transitional phase, there are both disadvantages as well as advantages to adopting the process. In the year 2017, around 11.6 billion dollars had been raised from 153 IPOs. This is known to have been directly related to a common perception of a stable market environment. However, from a leadership perspective, a number of different factors need to be considered before Initiating an IPO. This article will focus on the different avenues a CFO will have contemplate on before the act of launching an IPO into the stock market.
In India the growing problem is of Startups counting favourably for large corporates or private equity firms to absorb them. This process is positively considered as a reliable step towards forward momentum. The year 2017 raked in 244.6 billion dollars as part of early stage VC funding. This is a curious number mostly because it a surprising 35% low compared to the cumulatives from the last 3 years. There seems to be an almost similar consensus when it comes to Angel investors, as they had successfully seeded an amount of 300 million dollars in the year 2016 alone. However, these numbers drastically dwindled to 155 million dollars in the year 2017. The easy conclusion to make at this level is that the current market seems to be inclining towards caution as far as private funding is concerned. It is suggested that most angel investors at this point are only willing to back startups that have an established knack to garner a loyal customer base. CFOs would need to carefully evaluate their company’s client bases if they are planning on taking up private funding at a later date.
There is a lot of scrutiny attached to IPOs. Careful and deliberate auditing needs to be done before an IPO can be initiated. Going public requires tremendous amount of discipline from the people crunching the numbers. A CFO would need to accurately be able to project the bottomline numbers with an accuracy of upto 95% for the current year. This is because shareholders will measure a company’s worth by the veracity of how the company performs against the projected numbers. When you put your stocks in the public sphere, there has to be a promise of stability attached to it. Public markets are not very big on volatility. Hence, making sure your company is ready at a financial level is a very big responsibility when contemplating IPOs.
When you are a firm growing at a tremendous rate, the private market can more than provide exit strategies that can keep your liquidity problems in check. On the other hand, after your company reaches a certain size, public listing is more or less an eventuality. Going public elevates your company’s credibility to a level that opens up multiple avenues of liquidity creation. This is mainly because there are multiple compliance practices attached to IPOs, there are levels of profitability you would need to maintain; as well as a consistent customer base. Each of these factors would come under express scrutiny and the companies who do manage to successfully list themselves for the public. The IPO itself is a validation for the success of your company’s business practices and its viability in the changing landscape of the economy.
IPOs are a tremendous amount of work. They need careful contemplation and sustained hard work to pull off. However, they are not the only way to keep your company’s liquidity intact. Private funding is a huge industry in India and the profits churned out by the unicorns of today are only getting bigger. The core question a CFO needs to deliberate in the end revolves around determining the right time to IPO. This in the end is a rather dynamic question that can only be answered through an iron clad understanding of your company’s finances and its readiness to transition into a better organisation.