The Right Moment: Deciding When to Go Public

Indian stock exchanges rank first in the world in terms of the number of IPOs in 2023.

In 2023, 57 Indian companies successfully raised ?49,434 crore through main board IPOs, reflecting a robust market despite a 17% decrease from the previous year's ?59,302 crore raised by 40 IPOs, according to Prime Database. While the record-setting 2021 set a high benchmark with ?1,18,723.17 crore from 63 IPOs (partially due to Covid backlog).

2024 current figures highlight a vibrant and promising IPO landscape in India. More than 150 companies have raised nearly $5 billion through IPOs between January and July, nearly double the amount raised in the same period last year, LSEG data shows.

The Indian IPO market is enjoying a peak period of success, thanks to a strong domestic economy and heightened investor confidence. It has become a prime platform for ambitious businesses and a valuable opportunity for enthusiastic investors.

This leaves many SMEs and start-ups to think if and when will be it a wise decision for them to go public. Deciding when a company should go public is a complex decision that depends on a variety of factors. Here are some key considerations that can help determine the right timing:

1. Financial Health

Investors are drawn to companies with a history of consistent earnings and profitability, as this indicates a stable and reliable business model. Steady earnings provide confidence that the company can maintain financial stability, manage expenses, and deliver predictable performance, even in varying market conditions. This track record makes the company more appealing and lowers perceived investment risk.

Growth Potential: Investors also seek companies with strong growth potential, meaning the ability to scale operations, expand market presence, and increase revenues. Demonstrating a scalable business model and a clear plan for future expansion, whether through new markets, products, or technological advancements, is crucial. Companies with clear growth strategies can attract investors looking for high returns, enhancing their appeal during an IPO.

2. Market Conditions

Bullish Market: Investors are drawn to companies with a history of consistent earnings and profitability, as this indicates a stable and reliable business model. Steady earnings provide confidence that the company can maintain financial stability, manage expenses, and deliver predictable performance, even in varying market conditions. This track record makes the company more appealing and lowers perceived investment risk.

Stable Economy: Investors also seek companies with strong growth potential, meaning the ability to scale operations, expand market presence, and increase revenues. Demonstrating a scalable business model and a clear plan for future expansion, whether through new markets, products, or technological advancements, is crucial. Companies with clear growth strategies can attract investors looking for high returns, enhancing their appeal during an IPO.

3. Company Maturity

Operational Efficiency: Operational efficiency means having streamlined processes that optimize resource use and minimize costs, leading to better profitability. A company with efficient operations can produce goods or services more cost-effectively. A robust management team plays a crucial role in achieving this by implementing strategies that enhance productivity and quality. For IPO readiness, demonstrating operational efficiency and a strong management team reassures investors of the company's ability to execute its business plan and sustain growth.

Competitive Position: A strong competitive position is essential for attracting investors. This involves having a unique selling proposition (USP) that differentiates the company from competitors, such as innovative products, superior quality, or exceptional customer service. A clear USP helps the company capture market share and build customer loyalty. For a company planning an IPO, a well-defined competitive position provides confidence in its ability to compete effectively and grow in the market.

4. Growth Potential

Future Prospects: Investors want to see that a company has the potential to grow significantly in the future. They look for clear plans on how the company will expand its market share, increase revenue, and scale its operations. This might include plans for entering new markets, launching new products, or expanding existing services. A company with strong prospects should be able to show not just past achievements, but also a well-thought-out roadmap for future success.

Product Development: Companies with unique or cutting-edge products or technologies that meet a specific need in the market often stand out to investors. If your company is developing something new that solves a problem or improves upon existing solutions, it can make a stronger case for investment. Highlighting how your product or technology is different from what's currently available and why it matters to customers can make your company’s story more compelling and attractive to potential investors.

5. Regulatory Compliance

Legal and Regulatory Readiness: Ensure that the company complies with all legal and regulatory requirements for an IPO, including financial disclosures and governance practices. This may include documents like financial reports that show the company's current financial status, including income, expenses, assets, and liabilities. Additionally, the company should ensure it has a board of directors with appropriate oversight and independent members, as well as established policies for ethical behavior and risk management.

6. Strategic Goals

Capital Needs: An IPO provides a company with a significant influx of capital, which is essential for growth and development. This funding can be used to expand operations, such as opening new locations or increasing production capacity, thereby reaching more customers and driving revenue. It also supports research and development, allowing the company to innovate, develop new products, and stay competitive. Additionally, the capital raised can be used for strategic initiatives like acquiring other companies or paying down debt, enhancing the company’s overall financial stability and positioning for future success.

Liquidity: Going public offers liquidity by allowing early investors and employees to sell shares and access their investments. For early investors, such as venture capitalists and founders, an IPO provides an opportunity to realize returns on their initial investments. Employees with stock options or shares can also benefit, as they can sell their holdings and potentially gain substantial financial rewards. This liquidity aligns the interests of key stakeholders with the company’s long-term goals, enhancing motivation and commitment while also offering a tangible benefit for their contributions to the company's growth.

7. Management Readiness

Experienced leadership: It is crucial for navigating the complexities of a public company, ensuring compliance with regulations, and communicating effectively with stakeholders. Leaders must articulate the company's vision, manage public scrutiny, and respond to investor concerns.

Establishing robust investor relations (IR): Having a robust strategy is essential for transparency and maintaining shareholder trust. This includes regular communication through earnings calls, disclosures, and engaging with analysts. A dedicated IR team helps manage these interactions, fostering investor confidence and supporting stable stock performance in the future

8. Timing

Business Cycle: The company’s business cycle and key milestones should align with the IPO timeline to optimize market reception. This alignment involves strategically timing the IPO to coincide with periods of strong financial performance and positive business developments. For instance, launching an IPO after reporting strong earnings, securing major contracts, or achieving significant growth milestones can generate investor enthusiasm and boost the company's valuation.

Industry Trends: Industry-specific trends and developments play a crucial role in the timing and success of an IPO. Companies must closely monitor the broader market environment, including economic conditions, regulatory changes, technological advancements, and competitive dynamics within their industry. Favorable industry trends, such as growing demand for specific products or services, technological innovations, or regulatory shifts that benefit the industry, can create a conducive environment for an IPO

9. Competitive Landscape

Benchmarking:

Analyzing the competitive landscape, particularly through benchmarking recent IPOs in the same industry, is a critical step in preparing for a public offering. This process involves examining the performance and timing of other companies' IPOs to understand market sentiment, investor appetite, and the competitive dynamics within the industry. By evaluating recent IPOs, a company can gain insights into the valuation metrics, such as price-to-earnings ratios or market capitalization relative to earnings, that investors are currently favoring.

10. Internal Readiness

Financial Reporting:

For a successful IPO, robust financial reporting systems are essential to meet the increased demands of public company compliance. The company must implement advanced accounting systems and adhere to GAAP or IFRS standards to produce accurate financial statements. This includes establishing strong internal controls and an effective internal audit function to ensure the integrity and reliability of financial data. Regular reports must be filed with regulatory bodies, such as the SEC, including detailed quarterly and annual disclosures. Preparing financial and management teams to communicate clearly with investors and analysts is also crucial for maintaining transparency and trust.

Conclusion

Each company’s situation is unique, so there’s no one-size-fits-all answer. A company should carefully evaluate these factors and consult with financial advisors, legal experts, and investment bankers to make an informed decision about going public.