Sunday, November 20, 2011

Entrepreneurs should look beyond IPO


Entrepreneurs should look beyond IPO

Many young entrepreneurs set the goal of ‘completing successful Initial Public Offer (IPO) as early as possible’ for their enterprise, as though it is an achievement in itself, beyond which the enterprise would run on its own.  In reality, IPO is nothing more than a good source of capital for the growth of the company, and it comes with significantly higher levels of responsibility for the entrepreneur, much stricter compliance requirements and scrutiny by a wider audience of analysts and investors.  Entrepreneurs should understand the full import of the long term commitment associated with an IPO, and then pursue this with the seriousness that it deserves; IPO should not be construed as a “cheap source of capital” that can be raised at fancy valuations.

The fixation with IPO is a unique feature in India, which has the largest number of listed companies in the world, at over 6000 listed entities, but with a trading volume of less than 4% of the largest stock exchange in the world. A significant majority of these listed companies are thinly traded, and sparsely covered by analysts, leading to significant mismatch between the fundamentals of the company and its stock price. Very good companies of modest size could continue to do exceedingly well, but the share price may hardly reflect this growth and recognize the hard work of the entrepreneurs. And there is nothing the entrepreneurs could do, unless they resort to unscrupulous practices.

Such mismatch could seriously affect future fund-raising plans of the listed companies, and thereby defeat the very purpose of listing. Entrepreneurs choosing to go for IPO too early in the life of their companies could permanently curtail its growth opportunities. Given the current state of capital markets in India, IPOs are likely to benefit only large companies with significant market capitalization, say above Rs. 500 crores, and not the SMEs.

Listing a company could also result in significant loss of independence to the entrepreneur in running the company, whether be it a diversification into unrelated area or supporting an ailing group company; these are all looked down by the stock market and may also be frowned by independent directors on the Board.
Companies that remain private can many times enjoy more options than their listed peers. For instance, enterprising Private Equity investors can take comfort from track record of entrepreneur and back him in his new initiatives. Bank funding, multilateral funding, even debt capital market products are much more easily accessible to many companies today, without the associated problems of an IPO.

The pomp and glory of the opening listing day of an IPO may appear like a big achievement for the entrepreneur. But once the excitement wears down, the entrepreneur must realise that this is the start of a marathon meant for those with very long term vision for sustained growth of their enterprise.

N. Muthuraman is Co-founder of RiverBridge Investment Advisors Pvt. Ltd., a boutique financial advisory firm and can be reached at muthuraman@riverbridge.in

This is the blog of the Print Version published in Business Line dated 21st Nov 2011

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