The initial public offering (IPO) process is like launching a movie with no idea of how it’s going to perform or who likes it. Kind of the same, right?
Technically, IPOs are a breakthrough – or more of a transition from a privately-held entity to a publicly traded corporation.
It is a time of great excitement and anticipation, as companies look to raise capital and bring their stock to the public market.
However, this process is not without its challenges and the correction of valuations in IPOs has become a hot topic in recent years.
The brutal correction of markets
Remember when PayTM or Zomato went public?
These companies that were piggybacking off the hype and the conversations around them decided to launch their IPOs only to skyrocket in the first week and meet a dreadful decline.
Blame the correction of valuations in this case!
The correction of valuations refers to a situation where the market price of a company’s stock falls after its IPO. This can happen for a variety of reasons, including changes in market conditions, a decrease in investor confidence, or a failure to meet earnings expectations.
The correction can be temporary or permanent, and it can have a significant impact on the company’s reputation and financial performance.
While we did blame the market situation for this, it seems very evident that stocks like Zomato, Nykaa, or PayTM very much suffered brutal corrections, something they couldn’t avoid.
The demeanor of corrections
If there’s one thing that social media taught modern-age businesses, it’s that the bigger your valuation is, the more LinkedIn validation you’re going to get.
But when a company goes public, not everybody looks at the company with a pleasing eye. There are people that scrutinize – which leads to corrections.
The most common reason for a correction in valuations is a mismatch between the company’s perceived value and the actual value of its business.
Many companies will set their IPO price based on optimistic projections for their future growth and earnings. However, if the company fails to meet these expectations, the market may lose confidence in its ability to perform and the stock price will fall.
Another factor that can contribute to a correction in valuations is market volatility. When the stock market experiences fluctuations, investors may become more cautious and reduce their exposure to riskier investments, including newly public companies. The result can be a decrease in demand for the stock and a corresponding drop in its price.
The correction of valuations can also be caused by external factors such as changes in the economy or geopolitical events. For example, a recession or a geopolitical crisis can negatively impact the stock market and reduce investor confidence in the overall market, causing a correction in valuations.
Mitigating risks
Even though 2021 and ‘22 came with enough lessons for companies planning to go public, there are still important measures that could be taken. Let’s be specific!
- It is important for companies to be aware of the potential for a correction in valuations and to be prepared to navigate the turbulence of the stock market. This can be achieved by developing a clear and comprehensive financial plan that accounts for potential risks and uncertainties, and by keeping investors informed about the company’s performance and future prospects.
- Another way to mitigate the risk is to set the IPO price at a level that accurately reflects the company’s actual value. This requires a careful analysis of the company’s financial performance, market conditions, and competition. Companies can also consider using a slower and more controlled approach to the IPO process, such as a Dutch auction, which allows for a more precise determination of the company’s value and helps to avoid overvaluation.
- Another way to reduce the risk of a correction in valuations is to maintain a strong relationship with investors and the financial community. This can be achieved by regularly communicating with investors and providing transparent and accurate information about the company’s performance and prospects. Companies can also consider hosting regular conference calls, issuing earnings reports, and conducting roadshows to meet with investors and build confidence in the company’s prospects.
- Companies can also look to build a strong and stable management team to help weather any market turbulence and maintain investor confidence. This includes having experienced leaders who have a clear vision for the company’s future, a deep understanding of the industry and market, and a track record of delivering results.
Conclusion
In conclusion, the correction of valuations in IPOs is a common occurrence in the stock market and can have a significant impact on a company’s financial performance and reputation.
Companies must be prepared to navigate the turbulence of the stock market by setting accurate valuations, maintaining strong relationships with investors, and building a stable management team.
By taking these steps, companies can help ensure their success in the public market and secure their place as a leading player in their industry.
