Indian Markets · Primary Market
How a t-shirt idea in someone's head becomes a company you can buy on your phone — the funding ladder from angel money to IPO, and what "going public" actually means. Chapters 4–5 of the Zerodha Varsity module.
A company climbs a funding ladder — angels, then VCs, then PE, each buying a slice at a higher valuation — and an IPO is just the final rung, where it sells shares to the public for the first time. Every round trades ownership for cash, so the founder's stake shrinks in percentage while the pie it's a slice of grows far faster.
[+] = my addition, not in the source
| Stage | Investor | When | Risk |
|---|---|---|---|
| Seed | Promoter + Angels | pre-revenue | highest |
| Series A | VC | early, has revenue | high |
| Series B | VC + bank debt | expanding | med |
| Series C | PE | mature, big capex | lower |
| IPO | The public | proven, scaling | — |
Every giant company was once an idea nobody would fund. Infosys, a t-shirt brand, a corner bakery — each started with a founder who couldn't walk into a bank and ask for crores on a hunch. So how does a scribble on a napkin become a stock you can buy on your phone? It climbs a ladder, and the IPO is the top rung. This is the story of that climb.
Varsity tells this as a story: an entrepreneur wants to make organic cotton t-shirts. Follow the money and every funding term defines itself.
| Scene | Who invests | Money in | Stake | Company valued at |
|---|---|---|---|---|
| Seed | Promoter + 2 angels | ₹5 Cr | 50% held by 3 | ₹5 Cr |
| Series A | Venture Capitalist | ₹7 Cr | 14% | ₹50 Cr |
| Series B | VC + bank debt | ₹10 Cr + ₹15 Cr | +5% | ₹200 Cr |
| Series C | Private Equity | ₹60 Cr | 15% | ₹400 Cr |
| IPO | The public | ~₹125–150 Cr | ~16% | — |
Each rung is a different kind of investor, sorted by how much risk they'll stomach:
Bet at the pre-revenue stage on the founder alone. Highest risk, smallest cheques. Their money = the seed fund.
Invest once there's revenue to validate the idea. Medium risk, mid-size cheques (Series A, B).
Come in at a mature stage with large capex needs. Lowest risk of the three, biggest cheques — and often a board seat.
Each round the founder sells a slice, so their percentage falls. But every round also raises the valuation, so the value of what they still hold soars. The promoter's 40% was worth ₹2 Cr at seed and ₹160 Cr by Series C. Dilution isn't loss — you're trading a shrinking share of a fast-growing pie. This is the single mental model that makes startup funding click.
Three terms trip up everyone. Pin them down:
The fixed denomination stamped on a share (e.g. ₹10). Shares = capital ÷ FV. So ₹5 Cr at ₹10 FV = 50 lakh shares.
The maximum shares the company is allowed to issue — the full pie.
The slice actually handed out to owners. Always a subset of authorized; the rest is held in reserve.
Valuation is simply what the whole company is worth. When a VC pays ₹7 Cr for 14%, they're implicitly valuing the entire company at ₹50 Cr (7 ÷ 0.14). Capex is money spent to expand; debt is a loan that must be repaid with interest (finance charges) — which is exactly why founders often prefer selling equity over borrowing.
Every rung poses the same choice: raise equity (sell a slice, no repayment, but permanent dilution) or take debt (keep full ownership, but repay with interest whether or not the business does well). Debt is cheaper if you're confident; equity is safer if you're not. The story's company mixes both — that mix is the real art of financing a business.
Chapter 4 in one breath: businesses climb a funding ladder — angels (seed, highest risk) → VCs (early, has revenue) → PE (mature, big cheques) → IPO. Valuation rises each rung; the founder's percentage shrinks while their wealth grows.
An IPO — Initial Public Offer — is a company selling its shares to the general public for the first time. The main reason is the same as every earlier rung: raise money for capex. But going public carries a bundle of extra advantages:
Raising equity means no interest burden eating into profits.
Every buyer shares the risk the promoter once carried alone.
Angels, VCs, PE can finally sell their shares in the open market.
ESOP shares gain a public price — the Infosys / Google wealth story.
Why not IPO at Series A? Because early-stage companies aren't proven. When you see a company go public after rounds of credible VC and PE backing, those rounds act as a validation stamp — savvy investors already vetted it. Treat it with a pinch of salt, but a clean funding history is a genuine signal of quality.
A merchant banker (Book Running Lead Manager / BRLM) is the specialist firm that runs the IPO. Karvy, Axis, ICICI Securities and the like. Their job: due diligence, prepare the offer document, help set the price band, underwrite shares (agree to buy unsold ones), and run the roadshow.
The merchant banker is the company's wedding planner for its debut — vetting the guest list, printing the invitations (the DRHP), setting the budget (price band), and making sure enough people show up (underwriting). The company still gets married; the planner makes sure nothing goes wrong on the day.
The sequence, under SEBI's watch at every step:
The DRHP (Draft Red Herring Prospectus) is the document circulated to the public before an IPO — it carries the issue size, the number of shares, why the company wants the money and how it'll be used, full financials, management background, and the risks. It's the one document a serious IPO investor should actually read.
SEBI has the final word on whether a company can go public, and the DRHP is where the company must lay itself bare. Reading it is how you separate a real business from a hyped story before you put money in. "Read the DRHP" is the single most useful habit in the primary market.
Book building is how the IPO price is discovered. Instead of the company guessing one price, it announces a price band (say ₹100–₹120) and invites the public to bid a price and quantity within it. Collecting all those bids reveals what the market will actually pay. The final cut-off price is set where the most bids landed.
Book building is a reverse auction for price honesty. Rather than the seller shouting a number, everyone quietly writes down what they'd pay. Where the crowd clusters becomes the price — harder to fake than one seller's wishful sticker.
| Term | Meaning |
|---|---|
| Under-subscription | Fewer bids than shares offered. Weak sentiment — a bad sign. |
| Over-subscription | More bids than shares. "2× oversubscribed" = twice the demand. Strong interest. |
| Green shoe option | Lets the issuer release up to ~15% extra shares if oversubscribed. Also called over-allotment. |
| Fixed price IPO | One set price instead of a band (no book building). |
| Cut-off price | The final price within the band at which the stock lists. |
If an IPO is oversubscribed, you may not get all (or any) of the shares you bid for — they're rationed or allotted by lottery. Retail beginners often assume bidding = owning. It doesn't; heavy demand is exactly when your odds of a full allotment drop.
Many people chase IPOs for the listing gain — the pop on day one when a hot stock opens above its issue price. It's real, but it is not guaranteed: plenty of IPOs list flat or below issue price, handing day-one buyers an instant loss. An IPO is a business you're buying, not a lottery ticket. The DRHP matters more than the hype.
Chapter 5 in one breath: companies go public to raise capex funds (and give early backers an exit); a merchant banker runs the process under SEBI; the DRHP is the disclosure you should read; book building discovers the price; and the stock then moves from the one-time primary market into the daily secondary market.
// answer
Angels back a company pre-revenue, on the founder and idea alone — there's no proof it works, so the chance of total loss is highest. VCs enter once revenue validates the idea; PE enters at a mature stage with a track record. Later rungs are progressively safer, which is why cheques get bigger and expected returns per rupee smaller.
// answer
Each round sells a slice (percentage falls) but raises the valuation (the pie grows). The promoter's 40% was ₹2 Cr at seed and ₹160 Cr by Series C. You'd rather own 40% of a ₹400 Cr company than 100% of a ₹5 Cr one. Dilution is a trade, not a loss.
// answer
Face value is the fixed denomination per share (e.g. ₹10); dividing capital by FV gives the share count. Authorized shares are the maximum the company may ever issue. Issued shares are the subset actually allotted to owners, with the rest held in reserve for future rounds.
// answer
Early companies aren't proven, and the public can't easily assess them. Private rounds (VC, PE) fund the risky early growth and validate the business first. By IPO time there's revenue, scale, and a track record — and the funding history itself signals quality to public investors.
// answer
The company sets a price band and collects bids (price + quantity) from the public; the cut-off is set where most bids cluster. This discovers what the market will genuinely pay, rather than relying on the company's own guess — a more honest, harder-to-game price.
// answer
The primary market is the one-time IPO where the company itself sells new shares and receives the money. The secondary market is the daily buying and selling between investors that happens forever after listing — the company gets nothing from those trades. "The stock market" you trade in day to day is the secondary market.
Angel → VC → PE → IPO. Later rungs: lower risk, bigger cheques.
Smaller slice of a much bigger pie. Percentage down, wealth up.
Raise capex without debt; exit for backers; reward staff; visibility.
The disclosure document — the antidote to IPO hype.
Bids across a band discover the cut-off price.
IPO happens once; trading happens forever after.
Reading proves you recognise these ideas; these prove you can use them. Try each before opening the walkthrough.
A founder owns 100% of a company.
A VC invests 8,00,000 for a 20% stake.
1) What valuation does the VC imply for the
whole company (post-money)?
2) After the round, what % does the founder own?
3) In rupees, what is the founder's stake worth
now vs before the round?Expected: 1) ₹40,00,000 · 2) 80% · 3) ₹32,00,000 now (was ₹0 realisable / a company with no outside value before).
Step 1 — implied valuation. If ₹8,00,000 buys 20%, the whole company is worth that stake divided by its fraction:
8,00,000 / 0.20 = 40,00,000This is the post-money valuation — the company's value including the fresh cash.
Step 2 — founder's new %. The VC took 20%, so the founder is diluted to 80%.
Step 3 — value of the founder's stake. 80% of ₹40,00,000:
0.80 * 40,00,000 = 32,00,000Why it matters: the founder went from 100% to 80% ownership — yet now holds a stake an outside investor values at ₹32 lakh, backed by real cash in the company. That's the smaller-slice-bigger-pie trick in raw numbers.
A friend is about to apply for a "hot" IPO. Find every mistaken belief and correct it.
1. It's 30x oversubscribed, so I'm sure to get
all the shares I bid for.
2. IPOs always pop on listing day, so it's free
money.
3. I don't need to read anything -- the price
band already tells me it's a good company.
4. Once I buy in the IPO, the company gets my
money every time I later sell the share too.Expected: all four are wrong; name the correct mechanism for each.
1 — "30x oversubscribed → I get everything." Backwards. Heavy oversubscription means shares are rationed or allotted by lottery — the more oversubscribed, the lower your odds of a full allotment. You might get a fraction, or nothing.
2 — "IPOs always pop → free money." False. Listing gains happen but aren't guaranteed; many IPOs list flat or below the issue price, an instant loss for day-one buyers. An IPO is a business, not a guaranteed pop.
3 — "price band tells me it's good." No. The band only says what range the company hopes to sell at. Quality lives in the DRHP — financials, risks, use of funds, management. Read that, not the band.
4 — "company gets my money on later sales too." Only the primary sale (the IPO) sends money to the company. Every trade afterward is in the secondary market, between investors — the company receives nothing from it.
Why it matters: each myth maps to a specific concept from these chapters — allotment, listing risk, the DRHP, and primary-vs-secondary. Spotting them is what turns IPO excitement into IPO judgement.