The IPO Markets (Part 1)

Rajesh and Priya are continuing their weekend coffee chats in Bangalore. Rajesh is getting more curious.

“Priya, I get how I can buy shares once a company is listed… but how does a company actually become listed? Why do they suddenly want to sell shares to thousands of people like me?”

Priya nods enthusiastically.

“That's the perfect question. The IPO (Initial Public Offering) is usually the last big chapter in a company's long growth story. To really understand why companies go public and how the process works, we first need to see how most successful businesses are born, funded, and scaled over many years. 

Let's follow a realistic Indian startup story - a company that starts making premium diaries with cool designs - and watch how it raises money step by step.”
 

4.1 Overview

Before we talk about IPOs themselves, we need to understand the typical funding journey of a business. Companies don't wake up one day and decide to list on the stock exchange. They usually go through several rounds of raising money - first from friends and family, then from professional investors, and finally from the public - each time proving their business model and increasing their value. This chapter shows that journey, so the IPO process makes complete sense later.
 

4.2 Origin of a Business

Scene 1 – The Beginning: Seed Funding from Angels

A young entrepreneur has a brilliant idea but very little money. Banks won't lend to a business that hasn't started earning yet. So he puts in his own savings and convinces two close friends to invest. 

These friends are taking a big risk at this super-early stage, so they become angel investors.

Together they put in ₹5 crore. This money goes into the company's bank account (not the founder's personal account) and becomes the company's initial share capital (also called equity capital).

Let's assume each share has a face value (printed value) of ₹10.

₹5 crore ÷ ₹10 = 50 lakh shares → these 50 lakh shares are the total authorised share capital (the maximum the company is allowed to issue).

The company allots (gives out) some of these shares right away:

• Promoter (founder): 40%
• Angel 1: 5%
• Angel 2: 5%
• Remaining 50% kept unallotted (reserved for future investors)
   

Table 4.1 – Shareholding Pattern at Seed Stage

At this moment, the company's valuation is ₹5 crore (the cash it just raised). With this money, the promoter starts small - one small factory and one shop.

Scene 2 – First Professional Money: Venture Capital – Series A

After two years of hard work, the company is earning revenue and breaking even. The founder wants to open more stores and build a second factory - he needs ₹7 crore more.

A venture capital fund (professional early-stage investors) likes the progress and agrees to invest ₹7 crore, but they want 14% ownership in return. This round is called Series A funding.
 

The company issues new shares (from the reserved authorised capital) to the VC.

Table 4.2 – Shareholding after Series A

Now the company valuation jumped to ₹50 crore, but how did the company suddenly become worth ₹50 crore?

This is called post-money valuation.

The VC paid ₹7 crore for 14% of the company.

If 14% = ₹7 crore, then 100% = ₹7 crore ÷ 14% = ₹50 crore.

The valuation jumped from ₹5 crore to ₹50 crore because:

• The business has already started selling products and has real customers.
• It has proven that the idea works.
• The money is going to fuel fast growth (more stores, more production). 
• Investors are willing to pay a higher price because they believe the future profits will be much bigger.

Early investors (promoter + angels) are already seeing their stake worth 10× more on paper.

Scene 3 – Next Round: Series B + Some Bank Loan

Three years later, the company is profitable and wants to enter three new cities. It needs ₹40 crore for capital expenditure (Capex) - this is a key term: Capex means spending money on long-term assets like new factories, machines, stores, or equipment that will help the company earn for many years.

They decide to fund it with a mix:

• ₹15 crore from their own accumulated profits (internal accruals - money the business has earned and kept inside).
• ₹10 crore fresh equity from another VC fund (Series B - they give 5% stake).
• ₹15 crore as a bank loan (debt - they have to pay interest and repay principal).

The new Series B VC invests ₹10 crore for 5% → post-money valuation becomes ₹200 crore.

Table 4.3 – Shareholding after Series B (simplified update)

Scene 4 – Big League: Private Equity – Series C

A few more years pass. The company is now quite big and wants to become a national brand and wants to launch new categories (pens, spiral notebooks, geometry boxes, etc.). Capex needed: ₹60 crore.

They avoid taking on too much more debt (interest costs would hurt profits) and bring in Private Equity (PE) investors who take 15% for ₹60 crore.

Table 4.5 – Final Pre-IPO Shareholding Pattern

Please note that 16% shares of the company are still reserved/unallotted.

Company valuation now: ₹400 crore. Early believers have seen 80× growth on paper.

Real Indian examples: Many consumer brands (Page Industries, Hawkins Cooker, Titan, Nykaa, early backers). Globally: Zomato, Paytm, and Flipkart are early investors.

This journey shows how companies raise larger and larger amounts at each stage, while valuation keeps rising as the business proves itself.

Now, if the company wants to expand and grow further, how will it get more money? This will be answered in the next section.
 

Key Insights

1. Businesses start small with promoter + angel money (seed stage).
2. As they show revenue and growth, VCs invest in Series A, B, etc.
3. Valuation jumps because investors believe in future profits.
4. Capex = money spent on long-term assets for future growth.
5. Later PE rounds bring large sums; debt is used carefully.
6. IPO is usually the final step when the company is mature and needs massive, broad-based capital.
    

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