Reasons for Startup IPOs

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A Startup company is a company which is at its very nascent stage of development. These companies are expected to grow fast by issuing IPO due to the products or services offered by the company that is perceived to have high demand in the market. These companies are newly born and are about to grow.

The most common difficulties they face are shortage of capital and the need for acceptability to the common people because these are not listed companies, and people have the least ideas about the quality of their products/ services. 

To overcome these difficulties, they opt for IPO through which they can get listed and raise the capital required for them to grow. 

Right now, in august 2022, many Startups are in queue to float their IPOs. Many analysts say this is the right time to float IPO for a Startup company. After the residual effect of the epidemic is over, the market is poised for a big leap forward. 

Investors, small and big, who were waiting on the sideline are ready to invest. These times, IPOs can be a good vehicle for their investment to grow. 

Under such circumstances, many companies have already applied to SEBI to allow them to float IPOs. Recently we have seen IPO from companies like Zomato, Paytm, Policybazaar, Nyka and more. 

And some companies like Zoho and Zerodha are waiting for their application to float IPOs to get approved. After successful birth and a good business record, all these companies wait eagerly but patiently to achieve their first goal and complete their journey to Dalal Street. 

Going public gives a Startup a huge advantage. In this article, we will discuss the advantages they expect from listing. These are the basic reasons why a Startup wants to go public.

  • A Startup company is a small company with a good product or service but needs help to reach the broader market. They need to expand by multiple times to achieve their target. 

They need huge capital. But they will need more than infusing capital for growth. They also need to gain the confidence of their investors and the common people, which will make them grow further.

Thus, a new company can eliminate their most important external constraint through listing. A Startup company provides quality services if it falls under the service-providing category or manufactures items that are perceived to have high demand in the market. 

A company’s primary constraint is short of capital required to grow. Once a company get listed, the company can tap the huge capital resources from the stock market.

This is the biggest advantage. The problem of needing more capital to expand goes away forever. Once the primary obstacle is gone, a company can focus on other important aspects to grow business.

  • As the company starts getting larger, more and more capital is required. More than private financiers are needed to lend huge capital. At that stage, a company needs to raise debts. Once a company gets listed, its books are out in the open for anyone to scrutinize and understand the company’s health. 

Institutional lenders are more comfortable lending money to listed companies. Also, the company’s stock prices show how it is doing and whether the company is growing. 

If traders and investors of stock show interest in buying its stock, it is indicative of the health and trustworthiness of the company. A lender would always prefer to lend money to such companies knowing that the lent capital is in good hands and will serve the purpose of lending. 

A Startup company knows that its worth increases multiple times once it gets access to enter Dalal Street. Therefore, many Startups wait their turn to enter the stock exchange.

  • Before a small company gets listed, its ownership lies with a small group of investors. Once the company is listed, the ownership of the company diversifies among the shareholders. That creates a sense of trustworthiness among investors. That is one of the big advantages the listed companies possess compared to the unlisted ones. The position of distributed ownership protects the company from several undesirable situations.
  • For the company’s customers, especially the B2B customers, it creates a sense of the trustworthiness of the company. Because of the presence of the Board of Directors and company books under the eyes of SEBI, the customers’ faith in the company increases. This factor, in turn, increases the business volume of the company. Because of getting listed, many competitors of the Startups need to catch up and compete with the reputation of the new Startup.
  • Once a company gets listed, as we have understood, its worthiness and reputation increase. Along with that comes another important attribute, the stability of the company. Everyone in the market understands that a listed company is more secure and stable than any non-listed company. 

Therefore, the company can hire more efficient employees who want to work in reputed and stable companies. In addition, placing ESOPs makes the jobs more lucrative to employees. ESOPs help the company to extract more from its employees. Hence, ESOPs serve the interest of both the company and its employees. 

The company’s employees can earn ownership of the company through ESOPs. ESOP is a great advantage for employees. They know if the company performs well, it is directly transferred into financial rewards through ESOPs. This advantage attracts the employees, and the full unit works harder for the company’s success.

  • Through public listing, a new window opens for the company. It opens the road for M&A (merger and Acquisition). Through this process, the company can merge with or acquire another company. Though the process is much more complicated, many take this option. It opens a route which proves to be advantageous for many companies.

These are the principal advantages which lead a newborn Startup to go for IPO. Many Startup companies are already well known and are waiting in queue for approval of IPO. It must also be mentioned that others want to avoid taking this route for growth. But overall, IPOs and public listing are proven paths to growth and success.

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