Fortune India Boardroom: Learnings from the listings of new-age firms

Starting in 2020, India has seen more than 23 startups being listed, where the issue size of the initial public offering (IPO) has been over `1,000 crore. Ant Financial- and Alibaba-backed One97 Communications (Paytm) still holds the record for the largest issue size of `18,300 crore, where a substantial portion was investors offloading their stake and only `8,300 crore was a fresh issue. However, the post-listing price has been a different story. For instance, shares of Paytm, which were listed at `1,955 apiece, is currently trading at `1,250 thereabouts. Shares of companies such as Ola Electric and Nykaa have been extremely volatile since listing. Then there are a handful of companies, such as Eternal (Zomato), CarTrade, and Digit Insurance, that have been positive for investors in terms of their performance since listing.

At the Fortune India Boardroom, investors and startup founders discussed what valuations today represent and whether expensive pricing is a deterrent for startups looking to list.

IPOs and the VC playbook

The Indian public markets have reinforced their faith in home-grown wealth creators and the tech innovation story with domestic investors welcoming these new-age companies. By and large, their public issues have been successful. Pranav Pai, Founding Partner & Chief Investment Officer, 3one4 Capital, says it has been heartening to see a bigger pool of startup millionaires, with a greater number of startups issuing ESOPs, which have helped in creating and distributing wealth to a larger base of people.  

That said, some founders who have oversold their story with unrealistic expectations and false promises have also bruised some bit of investor confidence leading to harsher judgements of such companies, he says. “I think the reality checks in the public markets are brutal,” says Pai. “As a VC we may be right or wrong in the five- or six-year time scale. But [in the] public markets, [one may go] wrong in a few seconds… one trade, one button, and `3,000 crore is gone.”  While exorbitant valuations may now have been moderated, “sometimes leaving money on the table is the most important thing”, says Pai, given that an IPO is just an event in the long journey of a company and not the end of the road. 

The other reality check that IPOs have given to venture capitalists (VCs) is looking at their investment from a far wider lens. Rahul Chandra, Managing Director, Arkam Ventures, says that their investment thought process for India’s startups is being shaped by a macro supposition such as the technology needed to penetrate 500 million small businesses to formalise them, value chains that are getting created by accident or by force—for instance, creating an entirely new toy manufacturing ecosystem in India .   

But the biggest learning from the public markets has been the sobering down of valuation hype and the need for a defined path to profitability. For Arkam ventures, “I think it is a day one reminder for us—is this company going to go public or can it go public? It was never a part of the investment committee’s memo before. I think this question of ‘IPObility’ as we call it, is a very important check for us now,” explains Chandra.

Founders and the path to going public 

For founders, being able to build a predictable business before hitting the public markets has become guiding north star. Ananth Narayanan, Founder & CEO, BRND.ME, sees an IPO as one that replaces one set of investors with another. Being clear about what the business looks like in the next 8 to 10 quarters is very essential even before thinking about an IPO, he says. “You need to be really clear that in the next two years you are going to stay with whatever is the guidance, and I think that is the maturity that you need before you go public because otherwise, you’re letting expectations down,” says Narayanan.  

Similarly, Abhay Hanjura, co-founder, Licious, also agrees that building predictability into a business is paramount for a founder before going for a public offer. While for startup founders, the cap table may consist of investors with varied expectations, he thinks going public should be looked at in the context of the scale of the problem a company is looking to solve. 

Hanjura says that timing a hot IPO market may not be in the best interests of everyone. “When you’re solving a large, meaningful problem and if you have investors who believe in the quality, in the size of the problem that you are trying to solve, I think the IPO date can really be timed from the period that you have delivered consistency of performance and internally,” he adds.