Startups going public have to be thoughtful about both substance and form

When private companies go public, it shouldn’t be the usual substance over the form concept– which insists on firms disclosing the realities of the business over merely complying with the rules, said Promeet Ghosh, Managing Director, India, at Temasek Holdings Advisors India Pvt. Ltd. 

Instead, he said, public companies need to be careful about both. 

“Because public markets are looking at both what are you doing and how are you doing,” he said while speaking at in a virtual seminar themed ‘Private companies going public” organised by Institutional Investor Advisory Services’s (IiAS) in a day-long event titled ‘The Start-up Boardroom: Building for the Future’, held last week. 

Around the same time, according to InnoVen Capital's Startup Outlook Report 2022, the startup ecosystem revealed that  58 percent of founders believe getting listed on the stock exchanges is a realistic exit route, compared to 30 percent in 2020.

With 2021 witnessing nearly a quarter of dozen tech startups joining the initial public offerings (IPOs) bandwagon in 2021, and a larger bunch of them having IPO plans during 2022, the takeaways from the IaAS summit are of gold standard.

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One of the key takeaways from the IiAS session was that startups (private companies) going public should be prepared for the regulatory changes and requirements including quarterly reports, metrics to disclose, and setting expectations. 

Amansa Capital’s Akash Prakash, who was also in the panel, said he felt that entrepreneurs don't spend enough time trying to understand what type of investors they should try to get when they go public. 

“Because a lot of these companies, which are going public today in India, are historically different. Many of them are still loss-making, many of them are still building businesses at various stages.”

“And you(founders) need an investor base which understands how to value a company, which is still making losses, and you need people who buy into you what you want to do with the company to develop into,” Akash added. 

Stock market moves aren’t entirely based on a company's financial fundamentals or performance, but also how investors expect the company and industry to perform. “I do find that this is not always well understood, and that frequently is a bit of a surprise,” said Promeet. 

Clearly, a company’s primary business won’t change as much in a month as its stock price. Zomato, which listed in July last year, is a clear point in case. 

In a note to Zomato employees, on January 24 – when its share price hit the lower circuit with 20 percent fall, Deepinder Goyal, Zomato’s Founder and CEO wrote: “We cannot control the market’s sentiments or the macro-economic factors which also significantly impact our valuations.” 

Generally, the private investors in a startup (private company) have a better perspective on the company’s performance, given the engagement they have with the founders. This isn’t the case with public investors. 

“Public markets are far more focused on sensing whether you (company) have kept your promises,” Promeet said. 

So, startups going for their IPOs need to be mindful of this.  For such companies, even after the IPO allocation, presenting and communicating the right message to public shareholders becomes crucial. 

“The fact of the matter is that public markets move on large growth factors and being unduly focused on that marker, which continually moves throughout the day, is actually a distraction,” Promeet added. 

Entrepreneurs should be focused on creating value through their offerings. “They should be focused on their stock market price – which determines their market valuation–increasing in the long run, instead of interim changes,” Promeet added. 

The panel also had Manan Lahoty, Partner at IndusLaw - a multi-speciality law firm - who spoke on the founder versus promoter situation which is peculiar for startups aiming to go public. The bigger companies which IPO’d in the previous years had promoters.

“They (startups) have founders but not promoters, the difference being they're not controlling shareholders anymore,” said Manan. 

While the founders are the controlling shareholder at the start of the business, but subsequently at every consecutive fund-raise the founders keep getting diluted. 

However, governance standards have already been established to some extent by the existing private investors, which is evident by the fact that the board is not majority-controlled by the founders anymore.

At the panel discussion, the ‘private to public’ representation came from Pramad Jandhyala, Co-Founder and Director, LatentView Analytics - which IPO’d last year, and got listed on November 23 and registered a 148 percent gain at its listing day closing price of Rs 488.6 a piece on the BSE, against its issue price of Rs 197 apiece.    

Pramad shared an interesting anecdote that came through an advisor when LatentView was getting IPO-ready. “Going public and being public are two very different things,” said Pramad.

That clarity was useful for LatentView when it started the process of going public. “We kind of said: What does being public look like?, and that's a very distinct responsibility from going public,” said Pramad. “The process of going public is an intense process as there are a lot of steps along the way.”

Pramad enumerated those steps, around bringing the ideal persons on the board (of directors), filing the IPO prospectus, and a host of other compliances that are required to be in place. “Lots of times, you don't know what you don't know. And you are then relying on advisors to guide you along the way,” said Pramad. 

“While the advisors have all the experience and understanding of what it takes to go public, they may not understand our business the way we do and what it is that we want to convey,” Pramad added.

That fine balance of working with the advisors to arrive at all the disclosures that startups need to put in, are they being represented in the right way, is very crucial.

Pramad also highlighted that, for LatentView, the transition from private to public was something that they had in their mind fairly early on. “Even though we started out in 2006, we actually brought onboard a professional management team eight years after we started off. We had a professional CEO in place, 7 years prior to going public,” Pramad added.