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Effect of IPO Funding on IPO Listing

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An IPO, or Initial Public Offering, is the process by which a private company becomes publicly traded. So, when a company goes public, they sell shares of stock to anyone who wants to invest in them. Companies go public for many reasons, like getting money to grow, giving current shareholders a way to cash out, and boosting their reputation and credibility. Sharing stocks with employees is a cool way for a company to get and keep great workers.However, going public also comes with increased regulatory requirements and public scrutiny. So let’s start our today’s discussion on the effect of IPO Funding on IPO Listing.

Importance of Funding in the IPO Process

Funding is a crucial component of the IPO process because it enables the company to raise capital by selling its shares to the public. The capital raised through the IPO can be used for various purposes, including business expansion, investment in research and development, debt repayment, and acquisition of other businesses. According to Chittorgarh.com, in 2021, India witnessed 67 mainboard IPOs that raised ₹ 1.13 lakh crore and 105 SME IPOs that raised ₹ 2.300 crores. This was the greatest quantity and value of initial public offerings (IPOs) ever recorded in India. However, only eight mainboard IPOs totalling ₹ 6,500 crores and fifteen SME IPOs totalling ₹ 200 crores have been launched so far in 2022. The significance of funding in the initial public offering procedure can be summarized as follows:

Types of IPO Funding

The Initial Public Offering (IPO) funding process is a method by which a company raises capital by offering its shares to the public for the first time. Several types of IPO funding exist, including traditional underwriting, direct listing, and Special Purpose Acquisition Companies (SPACs).

1. Traditional Underwriting 

The most typical IPO funding method is traditional underwriting. The business employs an investment bank to guarantee the sale during this procedure. The investment firm then sells the shares to large and individual buyers. After subtracting the selling commissions, the business is given the funds from the sale after the investment bank determines the share price.

2. Direct Listing

In this IPO funding method, the business funds the sale without using an investment bank. Instead, the business immediately sells its shares on the stock market.

3. SPAC

SPAC is a company that raises capital through an IPO to acquire another company. In this process, a group of investors forms a shell company and raises money through an IPO. The SPAC then uses the proceeds from the IPO to acquire a private company, which becomes a public company through the merger.

Relationship between Funding and IPO Listing

The relationship between funding and IPO listing can be explained as follows: Funding is usually required for a company to reach a stage where it can launch an IPO. To go public, a company must have a solid business model, a history of profitability, growth potential, and compliance with regulatory requirements. Funding assists a company in achieving these milestones and preparing for an initial public offering. Additionally, funding impacts the valuation and pricing of an IPO. A company that has received funding from reputable sources, such as venture capitalists or angel investors, may have a higher market valuation and greater demand. The valuation and pricing of an IPO are also affected by the quantity and timing of funding. A company that has raised too much or too little capital or at the wrong moment may have difficulty determining the optimal price for its initial public offering (IPO). Funding also affects the performance and outcome of an IPO. A company with adequate and timely funding may have a greater chance of successfully listing on a stock exchange than one without. A successful listing occurs when the company can sell all of its shares at or above the offer price and generate positive returns for itself and its investors. A successful listing also improves the company's and its investors' market reputation and visibility.

The Effect of IPO Funding on IPO Listing

Initial Public Offerings (IPOs) is a big step for companies as they move from being privately owned to being owned by the public. IPOs have a lot of pros, but they also have some cons that companies need to consider before deciding to go public. Here are some positive and negative effects of IPO Funding on IPO listing.

Positive Effects of IPO Funding on IPO Listing

One of the most important things about going Public is that an IPO listing gives a company more credibility and visibility. By getting listed on a stock market, the business becomes more open and exposed to public review, which can improve its image and trustworthiness in the eyes of customers, sellers, and other stakeholders. This can also make people more familiar with and aware of the brand, which could increase sales and market share. One of the main reasons companies go Public is to raise money that can be used for many things, like funding growth projects, growing operations, or paying down debt. IPO funding can bring in a lot of cash, which can be used to start new projects, expand into new markets, or create new goods and services. This influx of cash can help businesses grow, make more money, and build long-term value for their owners. A public company is often more appealing to possible workers because it can offer competitive pay packages that include stock options or equity rewards. These cash benefits can help a company find and keep good employees, which is important for its growth and success. Being on a stock market can also improve a company's image and respect, making it more attractive to people who want to work there.

Negative Effects of IPO Funding on IPO Listing

When a company raises IPO funding, there is more pressure to meet the demands of owners and experts. This can make people pay more attention to short-term money success than long-term plans and goals. Companies may also get more attention from regulators and the media, which can take time and take resources away from other important business tasks. When a company goes public, it usually gives up some control and power to make decisions for its owners. This can make things more complicated and slow decision-making because businesses have to think about the needs and wants of many owners. Also, public businesses must follow many rules and laws that can make them less flexible and independent. When an IPO gives public shares, it dilutes the ownership rights of the company's founder. As new shares are given out, the founders and early investors may see their ownership percentage decrease, making it harder for them to steer the company's strategic direction. This can also cause the stock price to go down as the market takes the extra shares.

Impact on Valuation

IPO funding can have a significant impact on a company's valuation, which is the estimated worth of the company's business or assets. Here are some examples of recent IPOs companies whose valuations are significantly impacted after IPO funding.
Company Name Funding History Valuation and Demand in the Market
Zomato Raised over $2 billion from investors such as Tiger Global Management, Ant Group and Temasek Holdings In July 2021, its initial valuation was $13.3 billion; by February 2023, it had dropped by more than 40% to $7.8 billion due to regulatory uncertainty and increased competition.
Paytm Raised over $4 billion from investors such as SoftBank, Berkshire Hathaway and Ant Group When it went public on the Indian stock exchange in November 2021, it had an initial market value of $18.3 billion, but it dropped 27% to $13.3 billion on its debut day due to bad financial performance and overpricing.
Nykaa Raised over $500 million from investors such as TPG Growth, Fidelity Investments and Steadview Capital Had a high valuation of $10.5 billion in November 2021 when it went public on the Indian stock market, and saw a further rise of 79% to $18.8 billion
Policybazaar Raised over $1 billion from investors such as SoftBank, Tiger Global Management and Temasek Holdings The initial valuation $6.4 billion saw a drop of 25% to $4.8 billion on its debut day due to regulatory challenges and valuation concerns
Delhivery Raised over $1 billion from investors such as SoftBank, Carlyle Group and Tiger Global Management Had a low valuation of $10 billion in January 2023, but saw a further drop of 18.5% to $8.2 billion on its debut day due to weak financial performance and high competition
MapmyIndia Raised over $200 million from investors such as Qualcomm Ventures, Zenrin and Flipkart The initial valuation $1.03 billion saw a further rise of 103% to $2.09 billion on its debut day due to strong growth potential and niche positioning

Factors That Effect IPO Funding

A company with access to sufficient funding is more likely to complete an IPO and list on a stock exchange successfully. The following factors can impact a company's ability to raise funding and successfully list:

Case Studies

Examples of Companies That Successfully Listed After IPO Funding

Stocks Listing Gain
Adani Wilmar 183%
Hariom Pipe Industries 137%
Venus Pipes & Tubes 121%
Nykaa 79%
MapmyIndia 103%
Vedant Fashions 55%
Electronics Mart India 44%
Paradeep Phosphates  39%

Examples of CompanLife Insurance Corporation of India is That Struggled After IPO Funding

Stocks Listing Gain
Life Insurance Corporation of India -58%
Life Insurance Corporation of IndiaHariom Pipe Industries -31%
Delhivery -31%
Paytm -27%
Inox Green Energy Services -11%
CarTrade TechVedant Fashions -7.13%

Recommendations for Companies Considering IPO Funding and Listing

Companies should closely consider venture financiers, angel investors, government plans, and pre-IPO funds. They should evaluate each source's terms, expenses, and goals. Avoid raising too much or inadequate funds, impacting their value, pricing, and IPO success. Before starting, companies should consider market conditions, investor opinion, industry trends, and competition. They should avoid going public during high turbulence, ambiguity, or panic. They should also watch other IPOs in their field and region and pick a good time for theirs. Companies should evaluate their financial success, growth prospects, peer comparison, and market demand. Their price range should show their true value and business appeal. They should also adapt their price range to book-building comments. Companies should be open with possible investors, lawmakers, media, and other partners about their business plan, strategy, goals, risks, and opportunities. They should also match the standards of their stockholders, workers, and consumers with the IPO goals. Prepare for post-IPO review, compliance, and oversight.

Conclusion

In conclusion, the effects of IPO funding on IPO listing are complex and multifaceted. While IPO funding can provide companies with access to capital, increased credibility, and growth potential, it can also result in pressure to meet investor expectations, loss of control and decision-making power, and dilution of ownership. Additionally, the amount of funding raised through the IPO can significantly impact a company's valuation. Companies considering an IPO should carefully weigh the potential benefits and drawbacks of IPO funding and work with their underwriters to determine the appropriate pricing for their shares. Ultimately, the success of an IPO listing depends on a combination of factors, including market conditions, company performance, and investor demand. Want to know the best reliable and user-friendly brokerage services in India, consider SAMCO. With a range of services and educational resources, SAMCO can help you make informed decisions and build a diversified investment portfolio. Consult with a financial advisor and start investing today.