HOW TO SPOT A WINNING STARTUP IPO

As a flood of new listings burns small investors, we investigate the overlooked metrics

- Abhishek Mukherjee

Public markets are more demanding in terms of profitability, growth visibility, governance comfort and fair pricing. When these are missing, it often leads to weak listings.

(ISTOCKPHOTO)

Imagine you run a small business. Like most small businesses, it is a strenuously uphill climb. Finding customers requires backbreaking effort, raw material prices often shoot up unexpectedly, new competitors enter the market regularly, and every once in a while, the local policeman or municipal official drops by to enquire about your good health. You finally get to experience firsthand the gut-wrenching gap between rosy Excel sheet projections and the grim realities of running a business in India. Anyways, hope is the most potent aphrodisiac and you soldier on.

One fine day, some investors land up at your doorstep and gush about the good things they are hearing about the market, the runway for growth, the buzz around your business, etc., and request you to sell a part stake in your company to them. You are free to name any price. After you manage to hide your smile, what will be the price that you quote them? More importantly, when you name that number, whose upside will you really be trying to maximize yours or theirs?

This is a classic example of what economic theorists call 'informational asymmetry,' or a situation where one party (the seller in this case) knows far more than the buyer and therefore holds a decisive upper hand from the very start.

While most transactions contain some imbalance of information, nowhere is this gap wider than in initial public offering (IPO) investing. Which is why many astute investors refuse to come anywhere near such offerings.