This article first appeared in Digital Edge, The Edge Malaysia Weekly on May 13, 2024 - May 19, 2024

I have been speaking about the need to change the start-up funding narrative from the build to flip mentality to building enduring companies in my last few articles. I have also explained why mergers and acquisitions (M&A) do not really work in Malaysia because corporations in the country are risk-averse and, because of their dominant positions in the market, they are more interested in preserving the status quo and not rocking the boat by making acquisitions.

If M&A are challenging and do not work in Malaysia, then the only viable option as an exit strategy for investors is to prepare their portfolio companies for an initial public offering (IPO). There are, however, many questions on whether this is suitable for a start-up as there is a belief that IPOs are difficult to do and that markets only look for large listings while smaller listings may not do well.

Founders need to change their mindsets as this is far from the truth. The question is not whether they should opt for an IPO; the question they need to ask is whether they can achieve enough profit for investment banks to take on their listing and for there to be market acceptance of such a listing.

Unlike the current venture capital narrative — where you focus all your efforts on the top line by pushing revenues to scale at two to three times revenue growth a year and not worry about the losses, which may be significant — going for an IPO requires you to focus on the bottom line as well. Both investment bankers and the market will back profitable companies, so the question is not whether you can have an IPO but whether you can make, say, RM10 million in net profits which would make an IPO a shoo-in. I have spoken to several investment bankers and they all say the same thing: “Show me a company with a net profit of RM10 million and I’ll make the IPO happen.”

An IPO also has many benefits, especially if you want to build a large, successful and enduring company.

A listed company always has a better reputation as suppliers and customers believe that it is stronger financially, and since it had gone through stringent due diligence prior to listing and even when listed, there is less chance that the company would default on payments or fold the business. This is especially important for start-ups because larger customers would not buy products and services from start-ups because they worry that the start-ups would fail and it would leave them in a lurch. They would not have such worries if the company were listed. A listing also helps when dealing with banks and financiers as well as international customers. Hence an IPO provides instant and significant benefits for the company.

A listing also gives the company better visibility, especially in the media and among the investing public. It certainly creates greater visibility with financiers as they would be keen to lend to listed companies. Many listed companies also actively promote themselves through an investor relations programme to ensure their activities, growth and successes are communicated to the public. Leveraging the better visibility would only benefit the business.

As listed companies create a perception of strength and stability, it would also be easier to hire talented staff and to reward them via employee stock option plans (ESOPs). Some start-ups also have ESOPs but as there is no liquidity for the shares and it is hard to attribute a value to the shares, it does not excite staff as they do not see the value in them. A listed company, however, has a market price and immediate value creation potential for an ESOP option holder. Thus it is easier to hire the best talent.

Fundraising is really tough for start-ups, whether it is equity or debt. It is much easier for listed companies as banks would be more willing to lend them the money. They could also raise funds via bonds or conduct equity fundraising via private placements or rights issues. Listed companies have far more options to raise funds. The cost of funds is also lower for them compared to start-ups as they are perceived as less risky. One additional benefit is that the directors do not have to provide personal guarantees as financiers would accept a corporate guarantee instead.

This is by far the greatest value of a listed company, yet 90% of founders of listed companies do not realise this and do not use it to benefit their company or create value for shareholders. The shares that are listed have a value attributed to them by the market. Take listed company Inari Amertron Bhd as an example — the price per share at the time of writing was RM3.17 and its market capitalisation was RM11.9 billion. This is the value attributed to the stock by the market. If Inari wants to acquire a company, it does not have to pay cash. It can use the value of its shares instead. For example, if it wants to acquire a start-up for RM60 million, it can issue 20 million shares from its own share capital and acquire the start-up without using any cash. The sellers would get the shares, which are easily tradable on Bursa Malaysia. They could sell the shares if they wanted to, and RM60 million worth of shares would barely affect the market value of Inari since it is worth RM11.9 billion. This is what I mean by currency. The value of the shares is as good as cash.

Most US companies use this currency to significantly enhance their businesses by acquiring start-ups or even their competitors to improve their market share, or by acquiring technology, talent or markets to grow their revenues inorganically. This provides a boost to their revenues and market capitalisation, and that’s how a number of tech companies in the US became giants over time. American CEOs and boards realise that growth does not have to be merely a straight line organic growth. They know that they can use their shares as currency to acquire businesses to boost their growth.

Unfortunately, the CEOs of most of our listed companies do not understand this and even after listing their company, they continue on the same organic growth path, rarely or even never using the value of the listing for anything more than an exit exercise to cash in on their shares or to raise money for organic growth. Hence, the listed companies in Malaysia remain listless unless the syndicates punt their shares.

Other founders think that a listing is the end game, and upon listing they become too comfortable and lack ambition. This is when they just cruise along and the company becomes boring while the share price remains flat.

An IPO brings plenty of value to the founders and is a viable exit strategy for their investors like the venture capitalists that invest in them. Post-listing, founders and investors that remain can continue to grow the company in many ways that are not available to private companies, especially due to the ability to use their shares as currency.

There is so much value to being a listed company that it becomes essentially a vehicle for stronger, inorganic growth and this should be something all start-up founders aspire to. It is the next stage of your growth to becoming a strong, enduring, multi-generational business. Used smartly and strategically, an IPO gives you the opportunity to create an enduring unicorn like Inari Amertron, Vitrox Corp Bhd and many other technology companies listed on Bursa Malaysia or any other stock exchange.

It is time founders and investors changed their minds about an IPO as it is a more viable exit strategy for investors than M&A, which are totally out of their control. Focus on what is within your control — profitability and an IPO. You can’t go wrong with a focus like this.

Dr Sivapalan Vivekarajah is co-founder and senior partner at Scaleup Malaysia Accelerator (scaleup.my) and adjunct professor at Sunway University’s School of Science and Technology. He is also the author of Supercharge Your Startup Valuation.

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