Start with the 'Objects of the Offer'
This section tells you exactly why the company is raising money. Is it to fund expansion, develop new products, or pay off debt? Or is it primarily an 'Offer for Sale' (OFS), where existing investors and promoters are selling their shares? While some
OFS is normal, a heavily OFS-based IPO can be a red flag. It may suggest that the people who know the company best are cashing out, rather than raising capital to grow the business. A healthy mix with a significant fresh issue component for growth is generally a better sign.
Scrutinise the Financials
The offer document contains audited financial statements for the past three years. For startups, which are often loss-making, look beyond just profit or loss. Analyse the revenue growth trajectory—is it consistent and sustainable? Check the company's cash flow statements to see if it's generating cash from its core operations. Also, examine the debt levels. A company burdened with high debt might use the IPO proceeds just to service loans instead of fuelling growth. Compare these metrics with listed peers to get a sense of the company's performance within its industry.
Read the 'Risk Factors' Section Thoroughly
Every company must disclose potential risks to its business in the offer document, and this is a section investors should never skip. These aren't just generic industry risks; companies must list specific threats. Look for issues like heavy dependence on a few large clients, reliance on a single supplier, pending legal cases against the company or its promoters, and regulatory hurdles. Understanding these risks provides a more balanced view than the growth story presented elsewhere.
Understand the Business Model
Beyond the buzzwords, what does the company actually do to make money? The document will provide a detailed overview of its business operations, products or services, and the market it operates in. Try to understand its competitive advantages. Does it have a strong brand, unique technology, or a significant market share? Startups can have complex or unproven business models, so it's vital to be convinced of their long-term viability before investing.
Investigate the Promoters and Management
An investment in a company is also a bet on the people running it. The offer document provides detailed background information on the promoters and key management personnel, including their experience, qualifications, and any legal proceedings they might be involved in. A strong, experienced, and clean management team is a significant positive. Also, check the post-IPO shareholding pattern. A significant stake retained by the promoters shows they have skin in the game and confidence in the company's future.
Check for Lock-In Periods
Early investors and company insiders are usually subject to a 'lock-in' period, during which they cannot sell their shares after the IPO (typically for a few months). The offer document will specify these terms. It's important to be aware of when these lock-in periods expire. A large-scale sell-off by insiders after the lock-in ends can increase the supply of shares in the market, potentially putting downward pressure on the stock price.
