By Shrikant Goyal
The stock market is an ecosystem where change is a constant – peppered by growth, contraction, and recalibration cycles. For small and medium enterprises (SMEs) eyeing an initial public offering (IPO), understanding these cycles and navigating the timing of such a monumental step is crucial. As the market enters a correction phase, many SMEs are left pondering a pivotal question: Is now the right time to go public?
While market corrections can stir uncertainty, history shows that these phases can also present golden opportunities for companies with robust fundamentals to capitalize on investor attention.
Today, we explore the intricacies of the current market climate, explore the potential benefits and risks of going public during a correction, and provide SMEs with key insights to guide their decision-making process.
IPOs: A Strategic, Long-Term Play
The IPO journey is akin to a marathon, requiring endurance, strategic thinking, and long-term vision. In cricketing terms, it’s more like a Test match than a T20 game—patience and resilience are essential for success. While the market’s short-term outlook appears turbulent, businesses must avoid the temptation of making decisions based on immediate fluctuations.
What makes an IPO appealing, even during uncertain times, is its potential to raise significant long-term capital. For SMEs, this influx of funding can fuel expansion, innovation, and competitive positioning in both domestic and international markets. The opportunity to scale rapidly and gain access to new investors, customers, and markets can fundamentally change a company’s trajectory.
Take a look at global examples of companies that went public during market downturns. For instance, Alibaba’s 2014 IPO raised $25 billion, making it the largest IPO in history. This came after a period of significant volatility in global markets. After the 2008 financial crisis, several companies went public, capitalizing on the market’s rebound and securing significant valuations. The message here is clear: strong businesses with compelling growth stories can thrive, regardless of market cycles.
Understanding Market Cycles: Navigating a Correction Phase
To make an informed decision, SMEs must first grasp the nature of the current market phase. A market correction occurs when stock prices drop by 10% or more from recent highs. Unlike a bear market, which signals sustained declines, a correction is typically a temporary recalibration. In many ways, it’s a cooling-off period, prompting investors to re-evaluate their portfolios and shift their focus from speculative plays to companies with sound fundamentals.
For SMEs, this presents a unique opportunity. Market corrections offer an ideal time to showcase resilience and future growth potential. Investors, wary of overvalued stocks, often turn to companies that demonstrate a clear competitive edge, financial discipline, and sustainable growth prospects. These companies weather corrections better and are likely to emerge stronger once the market rebounds.
A great example of this dynamic is the 2020 pandemic-induced market. During market turmoil, several tech companies, including Zoom, Shopify, and Peloton, either went public or significantly expanded their market positions. Their success was not dictated by market timing but by the strength of their business models and the demand for their services.
The Resilience of Strong Fundamentals: A Non-Negotiable for IPO Success
One of the most critical lessons for SMEs is that strong fundamentals are indispensable for a successful IPO, regardless of external market conditions. Investors are more discerning during market corrections, which is visible in their shift in focus from short-term gains to long-term value. A company with a strong track record of profitability, clear growth potential, and strong leadership will naturally stand out during such times.
The story of companies for SMEs or Main boards that recently went public during this correction phase exemplifies this point. Despite the broader market decline, the company achieved a 90% premium on its listing day, driven by strong investor confidence in its growth prospects. Such cases underscore a crucial takeaway: A company’s fundamentals, not market timing, ultimately determine the success of its IPO.
For SMEs, this translates to having a solid business plan, compelling growth narrative, and robust financial health before stepping into the public market. The allure of quick capital should not detract from the need to prepare for the long-term demands of being a publicly traded company. Public scrutiny, regulatory obligations, and investor expectations can be overwhelming without the right foundation.
Strategic Alternatives to IPO: Pre-IPO Fundraising and Debt Financing
Despite the benefits, going public may not be the right option for every SME at this point in time. For those who are not yet ready to enter the public markets, alternative financing options are available to fuel growth.
Pre-IPO fundraising is an increasingly popular option for companies looking to raise capital before taking the leap to an IPO. This involves raising funds through private placements or strategic investors, allowing businesses to bolster their balance sheets without the immediate pressures of the public market. Pre-IPO fundraising also helps companies validate their market valuation, providing both the company and investors with insights into potential IPO pricing.
Similarly, debt financing is an option of choice for SMEs wanting to maintain operational control while securing necessary growth capital. By raising funds through debt, companies avoid diluting ownership and can still invest in scaling operations. While debt financing comes with repayment obligations, it can be useful for companies not yet prepared to relinquish equity.
Ultimately, SMEs need to weigh these financing alternatives against the benefits of going public. Each option comes with its own risks and rewards, but the decision should be guided by the company’s growth strategy, financial health, and long-term goals.
The Myth of Perfect Timing: Why Waiting May Not Always Pay Off
One of the most persistent myths in the IPO world is the belief that there is a perfect time to go public. While the idea of waiting for the market to be “just right” is appealing, the reality is that the perfect timing is elusive. Companies that delay their IPOs in search of better market conditions risk missing out on valuable opportunities.
A business with strong fundamentals will attract investors regardless of market conditions. Conversely, a company that lacks a clear growth strategy or solid financials may struggle even in a booming market. Waiting for the perfect time often leads to indecision and missed opportunities. The key is to focus on strengthening the core business and preparing for long-term success rather than trying to time the market.
Navigating the IPO Journey: Preparing for Life After the Listing
‘The IPO is not a destination; it’s the beginning of a new journey.’ While the listing day may grab headlines, the real work begins once a company becomes publicly traded. Regulatory requirements, investor relations, quarterly earnings reports, and market volatility all come into play.
SMEs that are well prepared for the IPO process find it easier to navigate the complexities of being a public company. Having a strong leadership team, clear vision, and disciplined financial management are essential for handling the demands of the public market. Additionally, a well-planned communication strategy is crucial for maintaining investor confidence and managing market expectations.
Final Thoughts: Seizing Opportunities During Market Corrections
In a market correction, SMEs should see an IPO as a chance to prove their resilience and highlight their strengths. Despite short-term volatility, corrections can reveal companies with solid fundamentals. SMEs must focus on building a strong foundation and prepare for the IPO journey, regardless of timing. Whether choosing an IPO or alternative financing, well-prepared businesses with growth confidence will succeed. By embracing public market challenges, SMEs can unlock growth and position themselves as leaders. In uncertain times, those who remain focused and confident shine the brightest. Now could be the right moment for SMEs to seize the spotlight.
Shrikant Goyal is the Co-Founding Member & Managing Partner of GETFIVE. Views expressed are personal. Reproducing this content without permission is prohibited.