InvestorQ : Why is it that a lot of start-ups are avoiding the IPO route altogether? What are your view on the IPO route for start ups?
manisha Kolvenkar made post

Why is it that a lot of start-ups are avoiding the IPO route altogether? What are your view on the IPO route for start ups?

Mahima Roy answered.
1 year ago

India has a number of very successful ecommerce start-ups which are yet to come out with a public issue. In fact, most of the successful start ups have deliberately avoided the IPO route. Take the case of some very successful players in India like Flipkart, OYO Rooms, and Ola Cabs and of course, Paytm. Each of these companies is already a multi-billion company in their own right. However, all of them have scrupulously avoided the IPO route. After all, public listing gives you access, visibility and prestige. Above all, it gives you the required currency to expand and diversify the business.

Even in the US, only 10% of the start-ups look for IPO route for exit compared to 75% in the previous decade. Start ups find it much easier to either hive of part of their stake to a VC or a P/E fund or sell out to a competitor with deeper pockets. The promoter of Flipkart selling their stake directly to Wal-Mart is a classic example of avoiding the IPO route. Paytm has already raised equity funding from the likes of Softbank and even the legendary investor Warren Buffett without IPO exit. Here is why most start ups do not prefer the IPO route.

· There is a concern that IPOs add to the volatility of the stock price. We have seen global start-ups like Facebook and Twitter see huge volatility after their listing. Infibeam of India, which acquired payment gateway provider CCAVENUE, lost 75% in a single day on some corporate governance issues. Start-ups are veering around to the view that the effort and risk in getting listed on the bourses is not justified by the benefits that IPOs offer. Most start-ups are in the technology space and they do realize that with the advent of algorithms and machine trading, there is very little control that humans have over the market. That is putting off a lot of these start ups from the IPO route.

· IPO process can be an expensive proposition. Going public is an expensive process and can be a steeply expensive proposition. The costs of an IPO wary from 5% to 8% of the funds collected through the IPO. The IPO also demands high levels of management bandwidth, systems and processes in place and a strong marketing and compliance team for shareholder and stock market interface. Most start ups are running tight ships and they are not willing to risk this kind of a cost. In addition, substantial executive time is also required, as well as hits to key operational, accounting, and communication processes. For start ups, the M&A process looks a lot simpler and easier to execute.

· IPO demands too much of transparency and disclosure and that may not suit the purpose of the start up. Of course transparency is good but most start ups operate on a much closed set of proprietary technologies that are best suited to a start up and boot strapped environment. An IPO will require revealing too much of granular details of the business and many start ups believe that this could compromise the confidentiality of their business model. Start-ups going public are laid open to competition and public scrutiny. Start-ups are typically run by a few executives who are loath to disclose via the prospectus and filings all the decision-making criteria, operational financial details and compensation formulas. That would not be possible post an IPO since the stock exchanges and SEBI would call on them to disclose a lot of information.

· If you want to avoid loss of control, then keep off IOPs; appears to be the rule. An IPO increases the chances of creeping acquisitions. Loss of management control and decision making power is a key factor that holds back start ups from opting for the IPO route. Public companies are always at risk for takeovers. Friendly or hostile takeover attempts are just a couple of the many ways that company founders sense a loss of control. The board of directors, as well as public stockholders, are no longer part of the inside team focused on the founder’s vision.

· Then there are a host of legal issues too. Civil and criminal liabilities are higher when the company is listed. Increased liability risk exposure is one more factor that dissuades start ups from opting for the IPO route. It also depresses valuations due to the higher risk quotient. Executives and directors are at civil and even criminal risk for false or misleading statements in the registration statement. In addition, officers may face liability for misrepresentations in public communications and statutory reports and filings. Such risks occur even if such errors are made without any intent to cheat.

Too much of volatility turns out to be a put-off. Most start-ups are not prepared for the market volatility and gyrations of the index and stock prices. Violent market swings usually hit public companies first. Once start ups are listed, they are also vulnerable to these risks. Private companies can often fly under the radar in turbulent times. Public stockholders are swayed by emotion and the activities of the crowd, than real market conditions. Start-up promoters do not enjoy the task of communicating to analysts, placating stockholders and keeping up with legal reporting requirements. They would rather focus on the product development and market potential generation.