Justdial Reference Point – Impact of IPO on employees and the Company
When VSS Mani launched his second venture, Justdial in a Mumbai garage, the thought of its IPO subscribing 11.6 times to INR11,000 Cr in the next few years, may have seemed surreal. Even more so after the blow Mani suffered in his first venture Askme. What anyone else would have treated as blow to confidence and retreated from business, Mani transformed into a mega-success.
With the ever spreading network of telephones and cell phones, there arose a need for something that served as telephone directory on a real time basis that could be accessed from anywhere at any time. And thus was born Justdial, which was helped in its journey to become a house-hold name by its brand ambassador - India’s famous baritone, Superstar Amitabh Bachchan.
Justdial’s revenues have charted a growth of 3X from INR 71.6 Cr in March 2008 to INR 277 Cr in March 2012. Profits have grown by about 31X from INR 1.7 Cr to INR 52.8 Cr over the same period.
As we talk about the sheer courage with which a once failed entrepreneur launched his second venture, and the perfect execution led by leveraging opportunities that the circumstances offered, what also comes to mind is what an IPO signifies for a company and its people.
According to late John H Freeman, professor of entrepreneurship at the University of California at Berkeley's Haas School of Business - "It takes a different breed of cat to run a large, highly public company.”
Typical Impact of an IPO on Employees and the Company
1. Cause of Distraction
Freeman says, "People spend most of their time congratulating each other on how wonderful they are and they forget to do business.” Usually, when a company has a visible, highly successful IPO, there's a loss of momentum. According to a study conducted by PricewaterCoopers on this issue, management faces a multitude of responsibilities in a condensed period of time, and governance questions can overwhelm boards and executives if they aren’t prepared to handle the many layers of governance planning. As a result, governance decisions get put on the back-burner, creating unnecessary risk. The many rules and requirements facing boards, including increasing shareholder demands, governance decisions for both ‘going public and being public’ merit early attention and consideration. As a result, employee issues may also suffer.
Moreover, sudden wealth is considered a disruptive force by reason that it is pretty much speculative and not exactly earned. Attention from work and moving towards more fulfilling objectives deviates to more speculation. Such market driven speculation on issues that can’t be controlled by employees yields nothing and only kills energy.
2. Employee Burn-up
Startup employees face demanding work schedules as they try to do more with fewer resources. Growing ‘Big’ is as exhausting as it is exciting. In preparation for an IPO, this strain increases multifold. After a certain stage, a saturation point is reached. And if such saturation is collective, it leads to further decline in work-life balance and productivity. In fact, it resembles the Marginal Revenue curve in Economics which after reaching its peak starts to decline, and if conditions are unfavourable, plummets low enough to undo the good it did.
3. Disparity in Wealth Creation
While an IPO does make employees wealthier, it makes some richer than others. This may have negative impact on their engagement levels and hence their productivity, in turn, impacting the overall organizational culture. It is understandable that an employee may have 100 shares and the immediate senior may have 150. But when the value of those shares goes from INR 100 to INR 900 and when the shares become tradable (translating to liquidity), the fact that (s)he has made a huge profit could get eclipsed by the fact that this senior’s gain is significantly more.
4. A Plethora of Speculation
An IPO comes with a range of speculation, ranging from growth in turnover to growth in employee numbers. Such speculation affects the employee’s perception and relationship with the employer. These issue get amplified by the fact that management gets caught up with regulatory, administrative and PR issues, leading to lesser time for communicating with employees. Such information asymmetry amplifies internal speculation and becomes detrimental to organization culture and employee engagement.
5. Resistance to Change
No one likes change and especially so in case of employees during an IPO. Their insecurity arises from the fact that something as big as an IPO that impacts the financials majorly, will definitely impact their stay, their job-roles, their salaries and their overall association with the company. The focus shifts from enhancing the company’s performance to protecting their own interests. Employees may resort to defensive tactics to protect their position and not be part of the growth story as a result of which the main idea itself is defeated.
6. Market Reactions
Companies going public become subject to external market functions that can dictate business decisions and schedule. Decisions may be made purely for the potential impact on the IPO, rather than the best long term interests of the company. This short-term "going public" mindset can have lasting impact on profitability and employee confidence.
7. Stress of listing compliances
IPO means listing on the Stock Exchange and carries with it an additional baggage of compliances. These are often are not limited to the Company Secretary and Management; they trickle down to the entire company who have to be all the more meticulous with documentation in procedures. This causes additional stress and worse still, the need for prudence translates to aversion for any risk.
In Conclusion
An IPO is a mixed bag of growth and chaos. Whenever there is huge growth, it is inevitable that there be huge chaos. It is important to weigh the pros and cons. Awareness of impact on employees is critical to achieve the overall organizational objective of growth and development.