Local search engine and telephone yellow pages Just Dial is popular all over India. When such a strong brand comes up with an IPO, it naturally generatesinterest. Whilesubstantial attention has been placed on the merits of investing in the IPO, few seem to have realized the significance it has for the entire Internet sector.
Exit: The Holy Grail of Venture Capital Investment
When VCs evaluate deals, they place emphasis on the growth potential of a company. For this they evaluate the industry, the market, the offering, and the team. But great corporate performance is not enough for a VC to make money. They also need to find an avenue for exiting their investments. The three primary modes of exit are:
1) Secondaries
In this form of exit, one investor sells to another investor. Conventional wisdom dictates that great returns are not likely in selling to the next round of investors. However, there is data that seems to show otherwise. The Indian VC industry has seen several secondary exits.
2) Trade Sales
If a competitor or a business in a related industry purchases the stake of the VC, we call it a trade sale. For many venture investors in India, a trade sale has been the only feasible exit option in the past.
3) Initial Public Offering (IPO)
Floating shares in the open market, and having them trade in a public stock exchange is the most desirable exit option for a VC. India has seen painfully few IPO exits. And that is why the Just Dial IPO is interesting.
The Rs. 940 Crores From the IPO Goes to the Investors
Most companies raise money through the IPO route to infuse capital into the company for funding growth and working capital. In the Just Dial IPO, the proceeds will entirely go to investors who will make a robust return. Since this IPO has mopped up close to Rs. 10,000 crores of interest, it is a very good sign for investors in other Internet-based service providers such as RedBus, Snapdeal, InMobi…
The Success of the Just Dial IPO Will Propel VC Interest in Internet Businesses
Many Internet businesses have seen a meteoric growth in top lines several of them are now working on shoring up their bottom lines. If an IPO exit at a healthy valuation seems likely, VC interest will shoot up in the sector.
Valuation
Some analysts advised against investing in the Just Dial IPO because of its steep valuation. Comparisons were made with share price of Google in the US, and Info Edge in India. In both cases, the Just Dial IPO valuation appeared frightfully high. But there were others who realized that the high valuation should be seen in the context of the expected rate of growth. Given the 12X oversubscription, the naysayers seem to be vanquished.
Selling stock at high valuations is the primary motivator for VCs to exit through the IPO route. If the near term listed price remains well above the issue price, the Just Dial IPO will to set a new trend for valuation of Internet stock.
Safety Net
To motivate small investors, the promoters of Just Dial have offered to buy back shares at the issue price if the share price falls. To know the exact mechanics of the safety net, please read the prospectus of the Just Dial IPO. For now, it is interesting to note that the safety net seems to have motivated retail investors to oversubscribe an IPO, which is priced at 55X of estimated FY 13 earnings. I predict that Internet IPOs with steep valuations will increasingly resort to such a safety net.
Investors Lapped it Up
So that the key point of this article is not lost, let me highlight it: Just Dial has managed to attract approx Rs. 10,000 crores of interest for its Rs. 940 crore IPO, which it valued at 55 times estimated FY 13 earnings. That should tell you why many venture capitalists are drooling at the prospect of making a killing with their own Internet IPOs.
~ Ajeet Khurana mentors start-ups. Given the safety net offered by the Just Dial promoters, he could not control his greed, and has subscribed to the IPO. An angel investor, trainer, author, entrepreneur and digital marketer, he is a member of the screening committee of Mumbai Angels, one of India’s oldest angel networks. In addition, he is a trainer for new angel investors with NEN (National Entrepreneurship Network). He is on the boards of Carve Niche Technologies and Rolocule Games. You may reach him on LinkedIn and Twitter.
Source Article from http://www.moneycontrol.com/news/features/the-repercussionsthe-just-dial-ipo_880756.html
