Dynamism and freshness in recent IPOs
The IPO is the holy grail for start-up founders. The IPO not only creates enormous wealth for the founders and the team, but it also indicates significant credibility and public acceptance for the company. Getting out with an IPO is and would remain an ambitious goal for start-up founders.
Start-ups that go public are nothing new in the United States and other markets. However, in India, cases of start-up IPOs have not been as frequent. Therefore, when a start-up goes public, and if the size of the offer is significantly large, public adulation is spontaneous.
The situation was no different when Zomato, the online restaurant discovery and food delivery platform, recently released one of the largest IPOs in India for 9,375 crore ($ 1, $ 3 billion).
When launching Changing orbits, a post on the Indian start-up ecosystem, Amitabh Kant, CEO of NITI Aayog, proclaimed Zomato’s offer as the success of “atmanirbhar capital ”- which means that start-ups no longer need to depend on foreign markets. Indian capital markets really have the depth to support the financing needs of innovative start-ups, he concluded.
About 60 days after Zomato’s IPO, another Indian-born start-up, Freshworks, went public in the United States. The size of the two offerings was similar and the two companies were comparable in terms of age and income at the time of the IPO (Table 1). However, the contrasting paths taken by the two start-ups to access public capital prompted us to compare the advantages and disadvantages of “”atmanirbhar Capital city” vis à vis “pardesi Capital city”. Our comparison focused on the following critical parameters of a public offering: quantum, cost, price and speed. Table 2 shows the main characteristics of Freshworks and Zomato IPOs.
The depth of foreign capital markets is well known. What Zomato IPO has demonstrated is that Indian capital markets also have the depth to raise large amounts of capital. However, it is important to keep the following in mind: First, as they say, the early bird catches the worm. It remains to be seen whether Indian capital markets would be able to support a continued flow of such large offerings from start-ups.
And, secondly, as Zomato’s IPO indicates, even when the offer is made in domestic markets, a significant portion of the capital comes from abroad. For example, foreign institutional investors accounted for 53.4% of the total bids received for Zomato shares.
Significant upfront costs are incurred in the IPO process. The lower it is, the more beneficial it would be for the business, as more capital from the funds raised would be available to the business. On this aspect, Indian capital markets score high.
Being a cost conscious economy, the initial IPO costs incurred are much lower in India. The cost of the IPO was 278 basis points lower for Zomato than Freshworks. This translates into a savings of 27.8 crore for every 1,000 crore raised.
The success of an IPO can be measured on many parameters. One of the important measures is “money left on the table”.
The higher the earnings on the day of the quote, the more money left on the table. While higher gains on the day of listing are welcomed by investors in the IPO, it may not be good for the issuing company as the higher listing gains indicate that the company has sold its shares at. a price lower than what investors were prepared to pay for it. .
Thus, the company could potentially have sold fewer shares to raise the same amount of capital or raise more capital for the same number of shares by pricing the issue appropriately. The lower listing gains for Freshworks indicate that the price discovery process appears to be much more efficient in overseas markets.
Sentiment in financial markets can change quickly. Preparing for an IPO process is akin to taking off an airplane. Once the process has started, stopping it halfway can be costly and even have an impact on the survival of the business. The longer the IPO process, the greater the risk to the company.
The amounts of capital raised by Zomato and Freshworks are very similar. However, Freshworks was able to complete the IPO process about half the time it took for Zomato.
Further analysis reveals that the regulator’s (US SEC) approval for Freshworks took 25 days from the date of filing with the regulator, while it took 66 days for Zomato to gain SEBI’s approval.
Interestingly, Freshworks opened on Nasdaq the day after SEC approval, when it took Zomato an additional 20 days to get listed after SEBI approval.
In short, on the four important parameters of quantum, cost, price and speed, “atmanirbhar capital ”has a definite cost advantage. However, there is a long way to go on the other dimensions.
When Girish Mathrubootham, CEO and Founder of Freshworks, rang the Nasdaq opening bell to celebrate its IPO on September 22, it reminded us of John Donne’s immortal lines: “Don’t ask who the bell is ringing for. It weighs for you.
Rajan is a professor at the Startup and Risk Finance Research Center, IIT Madras, and Nampoothiri has a PhD. Researcher at the Department of Management Studies, IIT Madras