How to Plan for an IPO – A Detailed Guide for Startups

Every start-up might start small but always have big dreams to grow. Growth and business expansion require capital and promoters, as they have limited ability to raise capital on their own. Promoters might have limited capabilities of raising funds from their own savings or family and friends, and raising funds from banks and other financial institutions often requires providing assets in the form of collateral. Hence, to grow big, promoters might need to opt for the IPO route and issue shares to the public to raise capital to fund the growth and expansion of their businesses.

However, planning an Initial Public Offer is not a task that can be done overnight, and requires detailed and meticulous planning, following procedures, rules, and regulations pertaining to the issuance of Initial Public Offers. Promoters also need to weigh in the pros and cons of issuing an Initial Public Offer.

What is an IPO

An IPO or an Initial Public Offering can be defined as an event wherein the company changes its legal status to a public limited company by issuing shares to the general public for the first time since its inception. An Initial Public Offering is one of the best ways for promoters to raise capital, especially in an event where their business is growing fast and at a rapid pace.

Why do Start-ups need to go Public?

• The most obvious reason for a start-up company to go public and issue shares to the investors is to raise capital for funding its expansion and growth plans.
• Public Limited Companies are offered better interest rates and credit terms as compared to other forms of companies and businesses. This is mainly due to the increased scrutiny and compliances required to be followed by Public Limited Companies.
• Trading on the open market means more liquidity for the company.
• Companies listed on the stock market can utilize a wide array of tools such as stock options to reward and retain talent within the company. Human resources are deemed to be the biggest asset to fuel a company’s growth, and hence it is essential for businesses to retain their talent and prevent them from being poached by their competitors.

What Start-ups need to consider before planning an Initial Public Offer

Start-up businesses are required to consider many things before they can plan to issue an Initial Public Offer and become a public limited company.

• The start-up needs to consider its historical financial performance and businesses need to have a good financial record and a robust system of financial reporting.
• The reputation, track record, reliability etc. of the promoters also need to be taken into consideration before planning an Initial Public Offer.
• The start-up needs to consider the direction of its existing business, and its future business plan post the IPO before planning for an Initial Public Offer.
• Start-ups also need to consider its technical know-how, collaboration with other businesses on a technical and strategic level etc.
• Risk Analysis of the Business.
• Estimations and the projections for the business regarding revenue growth, profitability, shareholders return on investment etc.

How IPOs allow the General Public to Invest in Start-ups

The initial public offering of a start-up is open for all form of investors including the general public and retail investors. Anyone with a valid and operational Demat Account can subscribe or buy shares of a start-up company during its Initial Public Offering. As almost every Initial Public Offering issues shares to subscribers in electronic or dematerialized form and a recent SEBI notification barring transaction of shares in physical form, it is essential for investors to have a Demat Account to enable them to invest and buy shares of an Initial Public Offer.

What is Demat Account?

A Demat Account is a form of an account which enables investors of stock and shares to hold their shares in electronic or dematerialised form. Post 5^th Dec 2018, SEBI has restricted the transfer of shares in physical form and transactions in share using a Demat Account enables electronic settlement of all transaction.

A Demat account is operated similar to a bank account wherein the Demat account holds stocks, shares and other forms of financial instruments instead of cash and similar to a bank account wherein the Demat account is credited and debited when shares are bought and sold. Investors can open a Demat account with zero balance of shares and also maintain a zero balance of shares in their Demat account. To know more about Demat Accounts and what is a Demat account, investors can contact their nearest Depository Participant.

Planning an Initial Public Offering for a Start-up

For a start-up company to launch a successful Initial Public Offering is a long process and a highly complicated journey involving a lot of planning, proper execution and patience. Some of the steps a start-up needs to undertake before launching its Initial Public Offering includes the following

• Preparing the Business for the Initial Public Offering

Before planning for an Initial Public Offering, it is important to ensure whether the business and the company is ready and prepared for an Initial Public Offering. It is also vital to analyze whether going the Initial Public Offering route is the correct strategy for the business and the company. The company needs to factor in the prevailing market conditions and the business environment, the performance of the business, assess the internal controls of the company, qualifications, and capabilities of the existing board of directors etc.

• Keep Options Open to Raise Capital

These days start-ups have several other avenues to raise capital can grow. These avenues include venture capital funding, angel funding, private placement, strategic sale through mergers and acquisition. The promoters of the start-up need to assess which route fits their needs and requirements towards attaining their business goals.

• Time the Market

A good Initial Public Offering launched with proper planning and execution can also fail with launched at the wrong time, at this moment it is important to evaluate the prevailing investor confidence and market sentiments, existing market conditions etc. before launching an Initial Public Offering.

• Setting and Implementing the required Organisational Structure required in a Public Limited Company

Post-IPO, when the start-up company becomes a public limited company, it might need to change the way it functions as public limited companies are required to follow a higher level of compliance and reporting as compared to other forms of business entities. Hence it is essential for the start-up to ensure that it has the right management structure and advisory board in place, the start-up has the financial and business infrastructure and processes in place which includes operational, IT processes, financial reporting, taxation etc.

The start-up also needs to ensure establishing a robust corporate structure and principles for corporate governance in place along with ensuring developing protocols and systems for maintaining investor relations, public relations, and communications.

Conclusion

While an Initial Public Offering might be one of the best ways to raise capital to funds a start-up company’s business growth and expansion, start-ups need to be open to explore other alternatives and weight in the pros and cons of going public and analyse its existing management and corporate structure before planning an Initial Public Offering.

Once the start-up is prepared to go public, launching an Initial Public Offering will require long-term planning, detailed and meticulous execution and launching an Initial Public Offering at the right time and at the right price to ensure that the Initial Public Offering is a success.

Author Bio:

Deepshikha Jehanghir is a seasoned writer who has over the years contributed quality content on various high-profile websites. She has particularly excelled in niches like Finance, Business, Entrepreneurship, Education etc. Her professionalism, four year’s experience, and expertise make her one of the most sought-after content writers in the field.

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