How to get the timing right for an IPO? An insider’s guide

Whether or not this IPO frenzy is sustainable is anyone's guess.

By Alok Bathija

It’s hard to drown in a sea of liquidity. That seems to be the prevailing sentiment in the Indian IPO market. By any measure, 2024 has been a breakout year for Indian capital markets.

India accounted for 25 percent of the global IPO activity in the first half of 2024, with investors netting an average gain of 30 percent from mainboard IPOs. SME IPOs have also seen stellar listing gains, and the BSE IPO index has outperformed the broader BSE 500 benchmark. With 5,450 mainboard-listed companies, India now boasts more listed entities than any other country in the world.

Signs of ‘irrational exuberance’

Yet, to any rational observer, signs of froth are beginning to appear. Recently, a dealership with two Yamaha showrooms and eight employees received Rs 4,800 crore in subscription bids for a mere Rs 12 crore IPO.

Whether or not this IPO frenzy is sustainable is anyone's guess. But it almost always is not.

While India’s macro fundamentals are strong, the business cycle is not immune to shifts. Even within a structural bull market, there is always scope for corrections due to global macro risks or tail events to dampen investor confidence.

As an operator within a VC working on exits, what are the practical implications of today’s markets?

Firstly, as of today, it would be rare to see a credible private investor rely on today’s market multiples to underwrite fresh investments. With horizons often extending a decade or more, it’s risky to base assumptions on current elevated valuations, as this leaves little margin for error. Market conditions are likely to shift, and predicting how the cycle will look at the exit stage is challenging.

The IPO is just another important milestone for a company. It is a means to an end, converting private securities into public ones. Bull markets facilitate this conversion easily, while bear markets have historically demanded stronger fundamentals to make a company “listable.”

An extreme example of the former is the SPAC market of 2021, where “Tesla killers” like Rivian and Lucid attracted investments despite limited proof points. In contrast, companies like Ixigo and Infosys, though having solid underlying businesses, faced challenging market conditions at listing.

Public investors want predictability

Even in a bull run, it is important to remember that not every company is ready for the public stage. Public investors demand a high degree of revenue predictability—an average business with steady earnings will often achieve a higher multiple than a high-growth business with volatile earnings. Clockwork precision in the profitability engine is necessary for sustainable growth.

Further, businesses on the path to IPO should have minimal experimentation left. Unlike private investors, public markets tend to reward short-term gains over long-term capital allocation. This could be seen when Zomato acquired Blinkit, with its stock capitulating, reflecting public market impatience. Of course, Zomato’s conviction on quick commerce proved beneficial, illustrating that strategic moves are sometimes underappreciated by the public market.

IPO preparation is also an opportunity to establish robust governance and transparency. A reliable CFO, a strong board, and efficient financial reporting are critical. Getting the “house in order” early on attracts more private capital, improves valuations, and instills investor confidence. IPO readiness should be pursued as soon as practical—having a public-ready profile signals stability and often leads to a valuation uplift as companies are compared to public peers.

When should an IPO be on a company’s agenda?

So, when is the right time to prepare? “Big is always better” if you have access to private capital and a very long time horizon.

While subjective, a rule of thumb suggests that companies with a clear line of sight to $10 million in EBITDA should start considering IPO readiness. For tech firms, where multiples remain relatively high, even a 30x multiple translates to a market cap of approximately Rs 2,500 crore ($300milion)—a viable size in the Indian market. India’s deep pool of small-cap funds provides ample opportunities for such companies to grow and re-rate as they scale.

Businesses with disciplined execution and strong fundamentals should take advantage of today’s public markets, which may offer cheaper access to growth capital.

(Alok Bathija is Partner, Corporate Development, Accel.)

Views are personal and do not represent the stand of this publication.