🕹️Why Boat cancelled its IPO

And raised 500 crore funding instead

Boat cancelled their 2000 crore IPO and instead raised 500 crore funding. Why? Let's find out👇👇

Suppose I run a late-stage startup. I have raised many funding rounds in the past. Now its IPO time! The problem is, IPO takes time and I don’t have time. My startup is happily burning money everyday and we will run out of money soon. So I need one last round of funding before the IPO.

I’ll start the fundraising process: I’ll call each investor and say, yo whatsup i need more funding. But the thing is, investors are tired. They have given me funding for Series A,B,C,D,E,F,G. They don’t want to go to H. Now they want returns. They want IPO.

This is not a big problem. I just need to make an offer they can’t refuse. If I give them more equity for the same funding, I’m sure they will accept my offer. That’s when my CFO drops the big bomb: we are out of stock on equity. For every round of funding, I had to give equity to investors. But I raised so many funding rounds that I don’t have any more equity left to give.

Now this is a big problem. If I can’t give equity to investors, I won’t get funding.

Sure, I could go for debt funding, which is basically a loan. But my startup is already loss making. Banks know I can’t afford to repay the loan. No chance of this. Also, I don’t want to take a big loan right before the IPO, makes my startup look bad.

What to do now?

That’s when someone tells me about a special type of funding called👇

🕹️Convertible preferred stock note:

It’s a loan, which magically converts into equity after some time. This is how it works:

1. Investors will give me funding.

2. Right now, this funding is structured as a loan. I’ll have to repay it, with interest.

3. But this loan is not permanent. It’s convertible.

4. Right now, I’m out of stock on equity. But IPO is coming soon. During IPO, many previous investors will say bye bye and sell their equity. Equity will be back in stock! That’s when the loan magically converts into equity.

5. Everyone is happy. I’m happy because I got the funding and I don’t have to repay the loan. Investors are happy because they get equity in my startup(plus some other benefits as well, I’ll tell you later)

Because these investors helped me get out of a tight spot, I’ll have to give them lots of favours:

1. When their funding converts into equity, they will get a discount. For example, if my IPO is for $100 billion, then a normal investor will get 5% equity when he pays 5 billion. But these investors will get more, maybe 6 or 7%(depending on how well I negotiated) for the same 5 billion. So basically, these investors are getting a discount on the valuation of my startup.

2. They get special liquidation preferences, which basically means if the titanic has crashed into the iceberg, they will get first preference on the lifeboat. If my company is going bankrupt or liquidated, these investors will get paid first.

3. The funding is initially structured as a loan to protect investors in a worst-case scenario. In case my startup is not able to do IPO or get another round of funding, then their funding won’t convert to equity. It will remain a loan and I’ll have to pay it back, with interest.

That’s “convertible preferred stock note” for you. I think of it as Funding Now, Equity Later.

🕹️Back to Boat:

Boat was all set for a huge 2000 crore IPO when they filed IPO papers in February. But then shit got real: war, recession, stock market crash, etc. IPO market turned dark. Boat realized, shit we can't do IPO, how do we get the money?

Boat needed this money badly. See, that’s the problem with Boat: it has no moat. Selling made-in-china earphones is hardly a groundbreaking innovation. That’s why they have so many copycat competitors: noise, fireboltt, ptron, zebronics, blaupunkt, mivi, boult, oppo, redmi, realme, infinity, oneplus. So they have to keep spending money to stay ahead of competitors.

Ideally, this money should come from Boat’s profits. Last year they had a profit of 80 crore on a revenue of 1500 crore. ET says that this year they have doubled profits, so 160 crore profits. But I think 80 crore and 160 crore were not enough to stay ahead of competitors. That’s why Boat has to keep raising funding, and that’s why they were going for 2000 crore IPO.

When the IPO window closed, Boat decided to go for the special funding: "convertible preferred stocks notes". Last week, Boat announced that they have raised 500 crore funding through "convertible preferred stocks notes" from Warburg Pincus and Malabar.

Boat IPO: Boat closes $60-million funding from Warburg and Malabar Investments - The Economic Times (indiatimes.com)

This means Warburg Pincus and Malabar are giving a 500 crore loan to Boat right now. This 500 crore will convert to equity later. Note that they haven’t specified that the conversion will happen on IPO only. This means the conversion can happen either during IPO, or if Boat is unable to do the IPO and instead raises another funding round, the conversion still happens.

According to ET: Boat has put a minimum valuation cap of around $1.2 billion as part of this funding

This is the valuation discount I told you about earlier. If Boat does the IPO at $2 billion valuation, normal investors will get 3% equity for 500 crore(~$60 million). But these 2 investors, Warburg and Malabar, will get a valuation discount. For them, Boat’s valuation will be 1.2 billion, not 2 billion. So they will get 5% equity for the same 500 crore.

With this 500 crore, Boat plans to do 2 things:

1. attack the smartwatch market: Right now Boat is No.3 in the smartwatch category. Noise and Fire-Boltt are leading the market. Boat doesn’t like this. Smartwatch is an important market. It’s the fastest-growing category in the wearables market. So they want to become no.1 in this market, just like the earphone market. Their plan for beating Noise and Fire-boltt: spending more money than Noise and Fire-boltt

2. payoff its loans: Right now Boat has 750 crore loan. They want to bring it down to 300-400 crore so that they are in good shape before the IPO.

The thing is, Boat had permission from SEBI to raise only upto 180 crore funding before IPO. Since Boat wanted to raise more, they had to cancel their IPO. Most probably, they will do the IPO in 12-18 months.

🕹️Many startups are going on the convertible road:

Boat is not the only startup to do this. Lots of startups wanted to IPO this year, but had to postpone because of the bad IPO market and instead they raised convertible funding. For example, Udaan likes convertible funding so much that they raised 2 rounds of convertible funding this year after postponing their IPO. In January, they raised $225 million and in October they raised another $120 million in convertible preferred stock notes. Pharmeasy also postponed their IPO and went for convertible funding: Online pharmacy startup PharmEasy has kicked off its rights issue to raise up to Rs 750 crore through convertible notes.

The goal of all these startups is the same: use convertible funding to survive the winter and get closer to profits so that IPO doesn’t flop like Zomato and Paytm.

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