Almost once a day, I meet someone who asks me ‘When are you going public’ ?
Relatives ask me, folks at the racecourse quiz me and even when I am in a loo in a 5 star hotel, my neighbor chuckles and says ‘ok dude – so when are you IPO’ing’?
I always tell them that none of my companies are IPO ready and more so, they look more like acquisition businesses than public company material. When I say it, people look at me as if I have belched out a large garlic cloud on them..
I am alarmed by this insane obsession of going ‘IPO’ and try and break down the pro’s and con’s here:
When a Company has private VC’s and is INSANELY & CONSISTENTLY PROFITABLE it may need to go IPO.
Why?
There can be many reasons:
– Investors who have backed the Company need liquidity and cannot get a massive upside other than the Capital markets. If you remember the Google listing, the Google founders were not to keen; yet the investors needed to take the Company public coz there was hardly anyone who could write out BILLION DOLLAR cheques to purchase investor stakes!!
– Once listed, the value becomes a massively tradable currency. You can buy and sell Companies using your stock and also incentivize employees to work for tangible ESOPS etc.
– A Company like Apple thrives in the Capital Market because it has become a money making MONSTER and is the darling of investors who can invest small moneys and yet participate in a massive global success.
Now, consider the negatives:
– A few dot com’s I know who really did well one in just one vertical niche line of business have gone public. Their CEO-Founders now spend ALL THEIR TIME just trying to manage Dalal Street/Wall street expectations. The problem with listed Companies is that they are measured – and then rewarded or punished by prices movement MONTH ON MONTH!
If you miss one quarter of earnings, YOU ARE BEATEN to death by price hammering.
I met Dinesh Agarwal of Indiamart.com yesterday and he explained it very beautifully to me. He said – ‘Alok, we all are very young and growing Companies. We need to focus on growth as much as profitability. If CEO’s only begin to think topline and profits, they stop actually running their businesses and more importantly stop investing in GROWTH opportunities – coz it does not contribute to immediate profits. Thats the most dangerous situation to be in for young Companies’!
– Your Market Cap is then what you are worth. In bad times, that can become a dreadful calling card. For instance, I have seen the price of Rediff.com beaten down so badly, that it was almost equal to and sometimes LESS than the CASH rediff.com had on its balance sheet!
Lots of predators then swoop in and plan how to quickly buy out a great Company now easily available thanks to a couple of bad quarters. Its available coz the owners made it publicly available!
– Sometimes, going IPO just draws very intense visibility to a Company, and depending on some luck and some circumstances, the outcome can be very unpredictable. Look at the case of SKS Micro Finance. Everything was hunky dory till they went public. Everyone then examined their business model with a microscope, vampires and demons emerged from attics and cupboards and the Company valuations have gone very badly downwards, destroying lots of value for retail investors.
– Often I believe that promoters go public for just Vanity. Its fashionable to say that ‘I am a listed company’ – whether its really good or not for you.
– Folks like ADAG have ruined their reputation by going IPO for green field ventures (Reliance Power) just on the basis of TRUST that millions of investors had placed on the family name. From day one the Company has turned negative for investors and this is the kind of IPO MEMORY that almost wipes out the reputation of a group forever – despite them having many better projects in the future (not that I believe ADAG will ever have any business plans that make sense).
The reason is simple – if you DISAPPOINT millions of small investors, they are much more likely to bad mouth you and never trust you again compared to a small bunch of private investors such as VC’s & Private Equity funds – whose business it is to invest money and lose it sometimes!
So an IPO can be a mass destruction weapon you sell yourself and which can turn and point back at you!
The world is full of surprises. Groupon refuses 6 Billion $$ buy out coz they believe they can get better values on listing. Twitter does 25 million $$ in revenues and is valued at 10 BILLION US$. If they list, would they get 40x on topline? I dunno!
And facebook! Big, careful, prudent facebook. Taking their own sweet time to do everything right. I think they will hit the market just when they have figured out all or most of their monetisation engines and have fired them up, so that Q on Q they are up, up and up…
Make sure you think IPO when you can manage Q on Q ( quarter on quarter) successfully. Else it will turn into a QSQT nightmare (Quyamat se Quyamat tak – meaning from one end of the world to another)
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