In a recently-published book ‘Startup Compass’, logistics startup Delhivery’s Co-founder and CEO Sahil Barua says that while going public does subject a company to the vagaries of the market, it is often easier to raise money from a large pool of public market investors than it is from a select group of private investors.
Last winter, when billionaire Vijay Shekhar Sharma broke into tears while launching
IPO at the BSE Towers in Mumbai, it was evident how important the journey to Dalal Street was for the fintech founder. Even though many successful startups like Zoho and Zerodha have chosen to remain bootstrapped, several other unicorns have either launched their IPOs or are waiting for the right moment.
But why do successful startup entrepreneurs subject themselves to the ruthlessness of public markets, which can turn on a dime? Is it just about raising more money after the VC-funded well has dried up?
In a recently-published book ‘Startup Compass‘, logistics startup Delhivery’s Co-founder and CEO Sahil Barua says that while going public does subject a company to the vagaries of the market, it is often easier to raise money from a large pool of public market investors than it is from a select group of private investors. Written by IIM Ahmedabad alumni Ujwal Kalra and Shobhit Shubhankar, the book is published by HarperCollins and brings together stories of how some of the most significant startups of the last decade were built.
Here are six reasons why IPO is important for startups:
1) The biggest advantage of being listed, according to Barua, is the access to a very large and inexhaustible pool of capital. “For a company, it takes away one of the most important external constraints that any business could have,” Sahil explains in the book.
2) An entry into Dalal Street makes it easier for companies to raise debt. “Private lenders place greater faith in listed companies. It becomes more difficult to raise financing from private investors as the company starts getting larger,” says Sahil, adding that lenders are more comfortable lending because your financials are out in the open and your stock price indicates how you’re doing.
3) Public listing also creates diversity of ownership, freeing the company from being controlled by a small clique of investors. “Public market investors span a wide range in terms of investment size and sensibilities. Distributed ownership protects the company from a shift in the position taken by any single investor,” says the book.
4) It is also a powerful signalling mechanism, not only in the eyes of investors but also for potential B2B customers. “You are being governed by a board, you are reporting to shareholders, you are generating financial returns that are publicly available, your books are audited and the Securities and Exchange Board of India is constantly checking the quality of your trading. These are all good things because it gives the customer confidence in your dealings,” Barua says.
5) Listing also creates value for employees through stock options. The prospect of stock price appreciation makes the company attractive to prospective employees.
6) Finally, public listing allows for ease in mergers and acquisitions. “As a public company, I can just issue stock, and the other party can simply buy it,” Barua says, adding that raising capital in a private round to do an M&A is far more complicated than issuing stocks.
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