The Story vs. The Spreadsheet
The most fundamental difference lies in what each company is selling to investors: a story or a spreadsheet. An established company, say in manufacturing or banking, goes public with a long history of operations, consistent profits, and physical assets.
Its Initial Public Offering (IPO) is typically valued using traditional metrics like the Price-to-Earnings (P/E) ratio, return on net worth, and dividend history. Investors can analyze years of financial statements to project future performance with a degree of certainty. A startup IPO, particularly in the tech sector, is a completely different proposition. These companies often prioritise rapid growth and market share over immediate profitability. Many are loss-making at the time of their listing. Consequently, their valuation is not based on past profits but on future potential—metrics like user growth, Gross Merchandise Value (GMV), or market disruption potential become paramount. Investors are buying into a narrative of future dominance, not a history of steady earnings.
Where the Money Goes
An IPO's structure reveals a lot about its purpose. Every IPO is composed of a 'Fresh Issue' and/or an 'Offer for Sale' (OFS). In a Fresh Issue, the company creates new shares and the money raised goes directly to the company, typically for funding expansion, repaying debt, or for working capital. In an OFS, existing shareholders—like founders, promoters, or early-stage venture capital investors—sell their own shares to the public. The proceeds from an OFS go to these selling shareholders, not the company. While most IPOs are a mix of both, the ratio is telling. Established companies may use IPOs for a balanced mix of growth capital and giving existing shareholders liquidity. However, startup IPOs often have a significant OFS component, as they serve as an exit route for early investors who funded the company through its high-risk private stages. A very high OFS component can sometimes be a red flag, suggesting that insiders are cashing out rather than raising funds for the company's future.
The Regulatory Path to Listing
The Securities and Exchange Board of India (SEBI) has different paths for companies to go public. The standard 'profitability route' requires a track record of net tangible assets, operating profit, and net worth. This is the path most established companies take. However, recognising the nature of high-growth, loss-making startups, SEBI introduced an alternative. Companies that don't meet the profitability criteria can still list on the mainboard, provided they allocate at least 75% of their IPO to Qualified Institutional Buyers (QIBs) like mutual funds and financial institutions. This is a crucial safeguard, as it places a larger portion of these riskier issues in the hands of sophisticated investors. Retail investor participation in such IPOs is often capped at just 10%. This regulatory distinction acknowledges the different risk profiles and aims to protect smaller investors from businesses without a proven history of profits.
Investor Base and Post-Listing Volatility
The type of investor an IPO attracts also differs significantly. Established company IPOs often draw a broad base of investors, including those looking for long-term value and stable returns. Their share prices tend to be more predictable post-listing. Startup IPOs, on the other hand, are high-risk, high-reward plays that attract investors with a greater appetite for volatility. The initial buzz can lead to massive oversubscription and huge listing day gains. However, this excitement can also lead to sharp price swings as the market tries to find a fair value for a business whose future is still uncertain. While some startup stocks have performed exceptionally well post-listing, others have fallen significantly below their issue price, reminding investors that hype does not always translate to sustained value creation.
