From Venture to IPO: Decoding the Public Market Journey For Startups

The stock market, a dynamic and unpredictable financial arena, is often viewed as a risky investment option due to its volatility. However, as startups achieve success, many entrepreneurs find themselves navigating the challenges and opportunities of the public markets. This strategic move, though fraught with risks, is driven by various factors, including the need for additional funding after exhausting venture capital sources.

The Future Outlook

Approximately 40  startups or modern enterprises are poised to go public or initiate share trading on stock exchanges by the financial year 2025, as per a recent report from consulting firm Redseer. This shift in focus toward profitability comes in response to a prolonged funding winter for Indian startups. The report projects a substantial rise in the number of companies listed or prepared for an Initial Public Offering (IPO) by FY28, highlighting a pronounced emphasis on achieving profitability.

Benefits of Going Public

Going public, or conducting an Initial Public Offering (IPO), holds several advantages for startups. Experts highlight that public companies find it easier to raise debt, as private lenders exhibit more confidence in listed entities. Moreover, as a company grows larger, securing financing from private investors becomes increasingly challenging.

The process of preparing for an IPO also brings about structural changes, establishing a robust boardroom. Going public introduces a diversity of ownership, shifting from a startup controlled by a small group of investors to a company with widespread ownership. This transition serves as a powerful signal for both investors and business-to-business (B2B) customers.

Listing as a public company creates value for employees through stock options. The potential for stock price appreciation enhances the company's attractiveness to prospective employees, facilitating the attraction and retention of top talent. Additionally, the public listing simplifies mergers and acquisitions, providing companies with greater flexibility in pursuing growth opportunities.

Understanding IPOs

An IPO, or Initial Public Offering, is the process through which a private company offers its shares to the public for the first time, transforming into a publicly-traded entity. The primary purpose of an IPO is to raise capital for the company's expansion and growth plans. During an IPO, the company collaborates with an investment bank to underwrite the offering and determine the initial price range for the shares.

In India, all public companies must adhere to guidelines set by the Securities and Exchange Board of India (SEBI) and stock exchanges. To initiate an IPO, a company must create a Draft Red Herring Prospectus (DRHP), including all necessary details according to SEBI guidelines. Following SEBI approval, the document is termed the Red Herring Prospectus (RHP).

After obtaining approval, the startup can conduct roadshows to market its IPO to the public, often involving large institutional investors to generate interest. The IPO process involves setting a specific date and issue price, open for subscription for 3-5 working days. Investors place bids within a certain price range, a cut-off price is determined, and shares are allocated based on this price.

Eligibility Criteria for IPOs in India

SEBI has established eligibility criteria for companies looking to launch an IPO in India to ensure a safe and transparent trading process. These criteria include:

• The company must be registered and operational for a minimum of 3 years.
• The company must have a consolidated net worth of at least Rs 1 crore for each of the past 3 years.
• The net tangible asset value for each of the past 3 full years should be around Rs 3 crore, with no more than 50% in cash or cash equivalent.
• The company's total issue size of shares should not exceed 5 times its net worth before the IPO.
• If a new name has been incorporated, at least 50% of its total revenue earned in the last year should be earned after the incorporation of the new name.
• No default on loans or other credit lines taken on behalf of the company.
• Criteria for BSE and NSE Listing
• For startups aiming to get listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), specific eligibility criteria must be met:
• Minimum net worth of Rs. 1 crore on a consolidated basis for the previous three years.
• Track record of distributable profits for at least three out of the preceding five years.
• Net tangible asset of at least Rs. 3 crore in each of the preceding three full years, with not more than 50% in monetary assets.
• Issue size of the company's shares should not exceed five times its pre-issue net worth.
• Minimum of 200 shareholders, with no single shareholder holding more than 75% of the total shares.
• Paid-up capital of at least Rs. 1 crore at the time of listing.
• Minimum public float of 25% of the total shares issued.
• No referral to the Board for Industrial and Financial Reconstruction (BIFR) or its equivalent.
• Redressal Mechanism for Investor grievances.

These criteria, subject to change, are set by SEBI to safeguard public money and maintain transparency in the trading process.

While the stock market poses inherent risks, the advantages that public listing offers in terms of fundraising, ownership diversity, signalling, employee value creation, and growth opportunities continue to attract successful startup entrepreneurs. The journey from private to public is a strategic move that, when navigated wisely, can unlock new avenues for growth and development.

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