Education

Entrepreneurs should look beyond IPO

N. MUTHURAMAN | Updated on March 12, 2018

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Many young entrepreneurs set the goal of ‘completing successful Initial Public Offering (IPO) as early as possible' for their enterprise, as though it is an achievement in itself, beyond which the enterprise would run on its own. In reality, IPO is nothing more than a good source of capital for the growth of the company, and it comes with significantly higher levels of responsibility for the entrepreneur, much stricter compliance requirements, and scrutiny by a wider audience of analysts and investors. Entrepreneurs should understand the full import of the long-term commitment associated with an IPO, and then pursue this with the seriousness that it deserves; IPO shouldn't be construed as a “cheap source of capital” that can be raised at desired valuations.

LISTED COMPANIES

The fixation with IPO is a unique feature in India, which has the largest number of listed companies on earth, with more than 6000 listed entities, but with a trading volume of less than 4 per cent of the largest stock exchange on the globe. A significant majority of these listed companies are thinly traded, and sparsely covered by analysts, leading to significant mismatch between the fundamentals of the company and its stock price. Very good companies of modest size could continue to do exceedingly well, but the share price may hardly reflect this growth and recognise the hard work of the entrepreneurs. Such a mismatch could seriously affect future fund-raising plans of the listed companies, and thereby defeat the very purpose of listing. Entrepreneurs choosing to go for an IPO too early in the life of their companies could permanently curtail its growth opportunities. Given the current state of capital markets in India, IPOs are likely to benefit only large companies with significant market capitalisation, say above Rs 500 crore, and not the SMEs.

ENTREPRENEURS

Listing a company could also result in significant loss of independence to the entrepreneur in running the company, be it diversification into an unrelated area or supporting an ailing group company; these are all looked down by the stock market and may also be frowned upon by independent directors on the Board.

Companies that remain private can many times enjoy more choices than their listed peers. For instance, enterprising Private Equity investors can take comfort from the performance record of an entrepreneur and support him in his new initiatives. Bank funding, multilateral funding, even debt capital market products, are much more easily accessible to many companies today, without the associated problems of an IPO.

The entrepreneur must realise that this is the start of a marathon, meant for those with very long-term goals for sustained growth of their enterprise.



(The author is ex-Director Ratings, CRISIL and Co-founder, RiverBridge Investment Advisors.)

>http://ChaseCut.blogspot.com

Published on November 20, 2011

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