But why do successful start-ups succumb to the ruthlessness of public markets, which can turn into pennies? Is it just about raising more money after the venture capital-funded well has dried up?
In a recently published book “Starting compass“, Start logistics DelhiveryCo-founder and CEO Sahil Barua says that although it goes public, the company succumbs to the vagaries of the market, it is often easier to raise money from a large set of investors in the public market than from a select group of private investors. Written by IIM alumni Ahmedabad Ujwal Kalra and Shobhit Shubhankar, the book is published by HarperCollins and brings together stories of how some of the most significant startups have emerged in the last decade.
Here are six reasons why IPO is important for start-ups:
1) The biggest advantage of listing, according to Barua, is access to a very large and inexhaustible capital fund. “For a company, this removes one of the most important external constraints that any business can have,” Sahil explains in the book.
2) Entering Dalal Street makes it easier for companies to raise debt. “Private creditors have more confidence in listed companies. It is becoming more difficult to raise funding from private investors as the company grows larger, Sahil said, adding that lenders are more comfortable lending because your financial data is open and your stock price shows how you are doing.
3) Public listing also creates a variety of ownership, freeing the company from control by a small clique of investors. “Investors in the public market cover a wide range in terms of the size and sensitivity of investments. Distributed ownership protects the company from a change in the position held by each investor, the book says.
4) In addition, it is a powerful signaling mechanism not only in the eyes of investors, but also for potential B2B customers. “You are governed by a board, you are accountable to shareholders, you generate financial income that is publicly available, your books are audited and the Indian Securities and Exchange Board constantly monitors the quality of your trading. All of these are good things because they give customers confidence in your deals, ”says Barua.
5) Listing also creates value for employees through stock options. The prospect of a rise in the share price makes the company attractive to future employees.
6) Finally, public registration facilitates mergers and acquisitions. “As a public company, I can just issue shares, and the other side can just buy them,” Barua said, adding that raising capital in a private M&A circle is much more complicated than issuing shares.