In this article, we will discuss
- Importance of Funding in the IPO Process
- Types of IPO Funding
- Relationship between Funding and IPO Listing
- The Effect of IPO Funding on IPO Listing
- Impact on Valuation
- Factors That Effect IPO Funding
- Case Studies
Importance of Funding in the IPO ProcessFunding 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:
- The proceeds from the IPO can be used to finance the company's development and expansion initiatives. This may involve investments in new products, expansion into new markets, and employing additional personnel.
- Going public through an IPO can increase the company's visibility and brand recognition, increasing sales and revenue.
- The IPO allows founders, employees, and early investors to sell their shares on the stock exchange.
- The IPO provides the company greater access to capital than private funding sources, such as venture capital and private equity firms.
- Going public via an IPO can enhance the company's financial position by decreasing debt and augmenting equity.
Types of IPO FundingThe 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 UnderwritingThe 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.
- The investment bank assures the business that the shares will be sold.
- The investment bank supports the company's marketing and advertising efforts.
- Underwriting charges may be very expensive.
- The business may have to cede some of its share price management.
2. Direct ListingIn 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.
- The business can escape paying the expensive screening costs of conventional underwriting.
- The stock price is something the business has more influence over.
- The company may not receive as much marketing and promotional support as it would with traditional underwriting.
- There is no guarantee that the shares will be sold.
3. SPACSPAC 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.
- The SPAC can provide more certainty to the private company than traditional underwriting or direct listing.
- The SPAC provides a quicker and less expensive way for private companies to go public.
- The SPAC may be unable to find a suitable target company to acquire.
- The SPAC may be unable to raise enough capital to complete the acquisition.
Relationship between Funding and IPO ListingThe 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 ListingInitial 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
Increased Credibility and Visibility
Access to Capital for Growth and Expansion
Ability to Draw Top Talent
Negative Effects of IPO Funding on IPO Listing
Loss of Control and Power to Make Decisions
Dilution of Ownership
Impact on ValuationIPO 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 FundingA 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:
- Market conditions: The overall market conditions can impact a company's ability to raise funding and successfully list. During economic uncertainty or market volatility, investors may be more cautious and less willing to invest in recent IPOs.
- Company performance: A company's financial performance and growth potential are important factors that impact its ability to raise funding and successfully list. Investors are more likely to invest in companies with a proven track record of financial success and strong growth potential.
- Investor demand: The level of investor demand for the company's shares can impact its ability to raise funding and successfully list. A company that generates high investor demand can price its shares higher and achieve a successful listing.
- Industry trends: Industry trends and investor sentiment towards a particular industry can impact a company's ability to raise funding and successfully list. Companies operating in popular or growing industries may be more attractive to investors.
- Company management: The quality of the company's management team is an important factor that impacts its ability to raise funding and achieve a successful listing. Investors are likely to invest in companies with strong and experienced management teams.
Examples of Companies That Successfully Listed After IPO Funding
|Hariom Pipe Industries||137%|
|Venus Pipes & Tubes||121%|
|Electronics Mart India||44%|
Examples of CompanLife Insurance Corporation of India is That Struggled After IPO Funding
|Life Insurance Corporation of India||-58%|
|Life Insurance Corporation of IndiaHariom Pipe Industries||-31%|
|Inox Green Energy Services||-11%|
|CarTrade TechVedant Fashions||-7.13%|
Recommendations for Companies Considering IPO Funding and Listing
Choosing the Right Funding Source and Amount
Timing the IPO
Setting a Practical Price Range