As grand as the Titanic was, an iceberg tore it all apart. And, boAt has just saved itself from that iceberg that has sunk Titanics like Paytm and Nykaa. How? By cancelling its IPO.
It has cancelled its Rs. 2000 crore IPO and instead has raised Rs. 500 crore from its current investor Warburg Pincus and new investor Malabar Investments. Not just boAt but startups like Droom, PharmEasy, and Mobikwik have done the same.
So, what has caused this sudden winter in the raining startup IPOs? Let’s find out.
What’s “choppy” for boAt?
“Market Conditions are currently quite choppy” as stated in the press release by boAt for cancelling its IPO. On the contrary, many IPOs are getting listed in the stock market at decent premiums. What is “choppy” for boAt is the lack of a cash-generating business model.
Back in 2016-17, the market of earbuds and headphones was uncaptured by big brands. BoAt saw this as an opportunity and launched affordable and cool products. So, the main backbone of the whole business was affordable products in an underserved market. Now, this has gone. Many brands like Noise, Boult, Mivi, ptron, etc. are giving fierce competition to boAt.
So, with your main moat being gone, you have to build a stronger one this time. And, for that you need funds. If you keep giving the pieces of cake, it will get finished someday. This is what happened with the company. It has no equity left to give to private investors in exchange for funds.
The solution? IPO! It has dual benefits. First, your private investors will get a happy exit with their pockets full. Second, you will raise more funds. But, all this will happen when your shares will get listed on premium and sustain that premium in the long term.
This wasn’t going to happen as startups like Paytm, Nykaa, and Zomato have taken a big hit in the stock market. Now, public investors value a company highly only by its capacity to generate revenue and profits. In the case of boAt, though, it is earning profits but it has to burn cash on the advertisement to compete and maintain its revenue. This spending is more than its profits.
So, had the company launched its IPO, it might have listed on discount. This would have meant a big hit on valuation. After this, the private investors also would have given funds at a lower valuation.
A wise decision: Cancel the IPO, Blame the market!
How did it raise funds with zero equity?
But, it did raise funds from private investors. With zero equity left, the company has raised 500 crores through preference shares. These shares are much more powerful than equity shares. There can be two possible scenarios. Either the boat floats or sinks. In case it sinks, the investors with preference shares will get paid first. So, this is less risky for investors. In case it floats, the investors will convert these shares into equity and get more profits.
You might be thinking, there is no equity so how will it get converted? Well, boAt said it will think about launching an IPO in 12-18 months. So, when the IPO will get launched, many investors will sell their shares and again there will be equity. This period of 12-18 months is basically, a time bought to build a strong moat.