IPO window always opens up if the entrepreneur walks down an articulate path to profit and the market believes in the business, Chairman and CEO of Palo Alto Networks said.
“The difference between venture capitalists and entrepreneurs is that the former has a clear entry and exit into the business. Entrepreneurs are stuck with the business. They have to build a robust business to stand the test of time. In that perspective, the window is always open, the question is - is your business ready? If you file for IPO and say the business is not ready, then it’s not a market problem, it's an entrepreneurial problem,” Nikesh Arora said.
Sharing his thoughts on the depth of entrepreneurship, Arora emphasised the ‘robustness’ of business models in the Indian startup ecosystem. He is hopeful that the unicorns have robust businesses and could survive the downturn. However, he did say that the businesses will have to raise money at lower valuation than before as the bumps in the road for unicorns have been re-ratings.
“I believe our regulations are not designed perfectly to understand the downturns in the startup ecosystems. There will be a healthy requirement for people to focus on profits and cash flows. To a large extent, the credit goes to the Indian market as it didn’t fall for the lofty growth expectations. The Indian market always says, ‘Show me the money’,” he added.
Speaking on the venture capitalists' aversion to risk in recent times, Arora stated that VCs are being cautious.
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“VCs have lived through many cycles. Asset prices were going up faster; quadrupling every six months. This led to the fear of missing out - everybody wanted to be in because they didn’t want to miss the upcycle. Thus, people were in there knowing the party was going to stop. However, they didn’t know when. The VCs have been around for a long time - they understand the markets and the cycle. They are more diligent and are spending more time on scrutiny. Most are glad that the party is over and they want to invest in real businesses for real terms. I don’t think they are in risk-off mode, they are in cautious mode. They will invest in good companies,” he said.
Talking about easy money during the pandemic sparking huge valuations, Arora said: “The pandemic scenario forced all risks to be eliminated because the pandemic in itself was a big risk and we started going into a risk-con mentality.
“We put a premium on growth and that resulted in valuations. People said money is free, you don't have to spend it, you don't have to pay any interest, you can load on debt, you can borrow money, you can create liquidity. So there's tons and tons of money in the economy that cause people to be a risk to the environment.”
“Suddenly, people realise that money has a cost. Every time you add 100 basis points to the cost, you see a re-rating of valuations in the market across the board. This means you're back to a scenario where people have to manage risk and execution which sets valuations at a certain pace.”
Earlier in September, Arora lauded India’s stability, resources and capability: “We have a demographic opportunity, also young people right population dynamics, and the GDP growth is phenomenal. And if we look at the global landscape, India offers a haven of stability and resource and capability, which I think will allow a lot of companies to succeed in the country.”
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