What does it take for a startup to be IPO ready in 2022?

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Most companies only focus on IPO (Initial public Offering) after they achieve unicorn status. Is it the right criteria? This is one of the most effective ways to raise funds for your business.

This blog will cover the many aspects of IPO, and how to determine if your company is ready to go public.

What is an IPO?

Initial Public Offering, or IPO, is when a private company offers its shares to public for the first-time in new stock issuance. This is also a way for the company raise capital from investors.

Private investors can use it to realize all of their investments. It can also be used to help founders or investors who have lost their investments. The company has the chance to raise capital by selling its shares.

Typically, companies employ investment banks to meet market demand and determine the price of an IPO.

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How does an IPO work?

An IPO before a company is listed is considered private. It is limited to a small number of shareholders, including cofounders and professional investors such as angel investors or venture capitalists.

IPO allows a company to raise capital, but it also gives them the opportunity to grow and expand faster. As mentioned earlier, companies who have achieved unicorn status (i.e. have reached a valuation of 1,000,000) usually advertise their interest to go public.

Private companies with proven profitability and solid fundamentals may also be eligible for an IPO. The maturity stage is when a company can withstand the Securities and Exchange Commission’s (SEC) rules and regulations.

It should also be able and willing to provide for the interests of shareholders and fulfill its responsibility. The company is eligible to start the IPO process if it has the ability to meet the requirements and market competition.

If a company decides that it wants to become public, all of its private shares will be converted into public shares. The public trading price equals the value of any shares that were held by private shareholders.

Every person who is interested in investing can contribute to the company’s shareholders equity. The number and price of shares sold determines the new value for shareholders’ equity.

Procedure of an Initial Public Offering

The IPO process can be divided into two phases: the premarketing phase, and the actual initial public offerings. Underwriters are responsible for assessing and taking on the company’s risk to pay.

After receiving private bids, these underwriters are chosen by the company to manage their IPO process. Multiple underwriters can be responsible for different aspects of the process, viz. filing, marketing, document preparation, etc.

These are the steps involved in the IPO process:

Proposals

Subscribing underwriters will submit proposals detailing their services, including their prices and share amounts, as well the time period for the market offering.

Underwriter selection

After reviewing the proposals, the Company selects an underwriter. A terms-based underwriting agreement is then prepared.

Formation of a team

To lead the process, a team of lawyers, underwriters, SEC experts and Certified Public Accountants is created.

Documentation

S-1 Registration Statement is the primary document required for IPO filing. It is divided into two parts: The prospectus and private filing information. The expected filing date is also included in this document. Throughout the pre-IPO process, it is subject to multiple revisions.

Marketing and Updates

The executives and underwriters market the new stock before it is issued. This allows them to determine the demand in the market for the shares, and decide the final price. Underwriters review the financial analysis and adjust it based on market responses. This could include changing the IPO price or the issuance date. Companies are responsible for meeting all requirements of the SEC and exchange listing.

Board & Processes

To ensure that quarterly reporting is compliant with audit requirements, a Board of Directors was established.

The issuance of shares

The shares are issued by the Company at the pre-determined date. The Company issues the shares as cash. It is then recorded in the balance sheet under stakeholder’s equity.

Post-IPO

Certain provisions are in place after an IPO. Underwriters have the option to purchase additional shares for a specific time period.

An IPO’s primary objective is to raise additional capital. The company also gains prestige and exposure from the public, which can increase sales and profits. Moreover, IPOs can lower capital costs for equity and debt.

Each year, many companies begin their journey to IPO. India witnessed an IPO boom of around 125 companies in 2021.

While 2017 saw the most IPOs, 172 were registered. The capital raised in 2021 was the highest. These 125 companies raised approximately 18 billion USD, compared to the 10 billion USD raised by 170 companies in 2017.

has earned handsome returns. However, companies listed in an IPO have seen strong growth in listing and increased subscribers. This is evident in Zomato and Tatva Chintan Pharma.

What does it take to make a company IPO-ready? This section will focus on the key factors that make an IPO company stand out from other companies.

It is a long and difficult process to become IPO-ready. It’s not enough for a company to think of it and then make an announcement the next morning. There are many things to manage.

The preparation of an IPO begins at least 12-18months before the actual announcement. During this period, there are several important factors to consider:

A powerful Board of Directors

A board of directors that is well-respected for their ability and decisions is a great idea when you’re looking to raise funds for your company.

This is a key factor in building trust and confidence within your company. Companies that are aiming to get IPO-ready should look for experts in different industries.

This is supported by numerous examples on the market. ixigo, for example, is an AI-based travel portal. They hired Mahendra Pratap Mall, an ex-chairman of IRCTC, as one of their board members shortly before filing for an IPO.

Aditya Puri, a former HDFC MD joined API Holdings, PharmEasy’s parent company before they announced their intention to go public.

Restructuring of the Business

Some businesses might need to do internal restructuring in order to put their best arm to work. These decisions, like those made by the board, must be made well in advance of the IPO process.

In Nuvoco Vistas (the cement arm of Nirma Group), internal restructuring was done before the IPO. The firm also acquired the Rajasthan cement unit. The company went public with an initial public offering of 5000 crore.

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