In October 2019, Karthik Reddy, founder of Blume Ventures, wrote about something venture capital investors always speak about, mostly among themselves, very rarely on the record, and rarely in detail. ”The inevitable path to sanity has to prevail i.e. ‘public listability’ of a business has to be demonstrated. Without this, we can’t ever claim to have built a robust start-up ecosystem. What we have now is a market where capital comes in, in droves, and other than the odd freak M&A outcome, we are in perpetual abeyance of the graduation to a profitable, sustainable enterprise,” he wrote.
His wishes seem to be on the cusp of coming true. Food delivery firm Zomato filed its draft documents to the public on April 28. Others, including cosmetics brand and retailer Nykaa, e-commerce logistics firm Delhivery and insurance marketplace Policybazaar are expected to go public in the next one year.
There are other names floating about as well, including software firm Freshworks and online retailer Flipkart. But the first four, according to sources, are planning to list in India (on the Bombay Stock Exchange or National Stock Exchange), further reason for excitement in the investor community. Others such as PepperFry, Mobikwik, Oyo, Paytm and Byju’s have indicated interest at some point but those plans are still fuzzy.
Zomato, Nykaa, Delhivery and Policybazaar seem the closest to and most serious about going public in India so far. But even so, their approach to listing, and the listing itself could give a lot of signals about the future of the Indian startup ecosystem, and what it means for founders, investors, bankers, lawyers, workers and more. The four could have a combined valuation of $18.5 billion (Rs 1,34,000 crore), if their valuation upper bands are to be assumed (Zomato: $8 billion; Nykaa: $3 billion; Delhivery: $4 billion; Policybazaar: $3.5 billion). Nykaa and Policybazaar declined to comment while Delhivery and Zomato did not respond to emails seeking comment.
What does all this mean?
India is in the middle of a stock market bull run, record highs for indices, and a bunch of extraordinarily successful IPOs from Burger King to Indigo Paints. And while current sentiment is particularly strong, the last couple of years have seen at least a few successful listings consistently.
These startup IPOs could still spur things to a new level. Their combined valuation of Rs 134000 crore is 67 percent more than the top five IPOs of the last two calendar years combined, if you don’t include the mega IPO of SBI Cards — a unique deal for a mature and very profitable company. Outside of the SBI Cards IPO last year, the top five IPOs in the last two years each had a combined post-IPO market cap of about Rs 80,195 crore, according to data from Prime Database. These still include bumper outcomes such as Burger King, Gland Pharma, and Sterling and Wilson Solar.
But it’s not as easy as that. For one, internet companies are a different beast from any of these large pharma, financial services or consumer companies to go public. Their scale is undoubtedly large, they are still growing quickly, but barring Nykaa, none of these local IPO candidates is profitable, unlike their listed predecessors.
The upcoming IPOs could be the first indication of whether India’s new economy has succeeded or not, financially speaking. Investors will get their first bite of an entirely new section of India’s economy — one that is touted to be the future, and one that has created an outsized impact in other countries. Technology commands the richest valuations and produces massive profits in the US and Chinese stock markets, although these profitable companies are also decades old (Amazon, Facebook, Alibaba, Tencent, et al).
Startup unicorns — valued at a billion dollars or more — have so far been able to command rich valuations based on future projections, market leadership with large losses, and the distant vision of a profitable giant. But those profits may have to come soon to justify a rich stock market valuation.
To some extent, companies have been realising this — reporting financials more regularly to the public (although it is not legally needed), shedding unprofitable lines of business, trimming costs, hiring seasoned finance professionals and bringing focus. And public market investors tend to value these companies in a very different way from how venture capitalists and hedge funds have been doing so far.
“For startups looking to go public, it can’t be just a numbers game anymore, and they can’t list just based on projections. The data has to be far more concrete. Not just valuations based on accepted accounting standards, but also strong market and business fundamentals,” said Vidisha Krishan, partner, capital markets and corporate laws, at law firm MV Kini.
Securities and Exchange Board of India (SEBI) requirements prior to listing need detailed disclosures on business plans, risks, profits, and where money will be spent. This is also because an IPO is seen as a way for retail investors to participate in a company’s growth story, as opposed to well-heeled funds and financial institutions, which have all the access anyway.
But because many of these companies are loss-making, the regulator doesn’t allow retail investors to participate beyond 10 percent of the IPO issue size. In a normal IPO, retail investors can subscribe to up to 35 percent of an IPO issue. But this route dictates a minimum pre-tax profit of Rs 15 crore for three of the last five preceding years, which most internet unicorns don’t have.
The first wave of startup IPOs, at least, is expected to be geared towards institutional investors. “We expect most of the internet company IPOs to be focused on institutional investors. These investors can evaluate valuations and may have a more long-term outlook,” said Bhakta Patnaik, partner and head of capital markets at Trilegal.
To be sure some of these IPOs, such as Zomato and Policybazaar, can have a size of Rs 4,000-7,000 crore, and even 10 percent of it could be a decent enough draw for retail investors and enough for their appetite. But the mentality of the bankers underwriting these deals is to attract top institutions, sources say. A solid retail allocation is perhaps a cherry on top.
But experts are still unable to conclude whether these companies can justify rich valuations and whether they will remain high even a few months after listing.
“Investors are advised not to value companies based on the projections of future earnings. But because of macro optimism and expectations of a V shaped recovery, there is a lot of liquidity, and thus internet companies could well get the valuations they want,” Patnaik added.
No imminent listings
Founders also need to restructure their capitalisation table. A cap table is the list of a company’s investors and their individual and collective rights prior to an IPO. “Startups should be looking to have a lean cap table, and give as many investors an exit as possible. But that will depend on the equation between investors and founders as well as the fund life of investors,” said Jay Parikh, partner at L&L Partners (earlier Luthra and Luthra)
Sometimes, even after filing their draft documents (DRHP) with the regulator, it takes up to a year to actually list. And all that is if market sentiment doesn’t shift.
Industry insiders are keenly looking at the first few startups — likely Zomato, Policybazaar, Nykaa and Delhivery — to see how things may pan out for the rest of the industry. If they do well, it could open a floodgate of companies wanting to go public — from mid-sized internet firms to the ever growing unicorn club.
“The first startup IPOs will serve as big guidance as to what happens to the rest. Questions over valuations, profitability and resultant investor appetite still remain. But as they say, the proof of the pudding is in the eating,” said Parikh.
No clarity on foreign listing
A slew of successful domestic internet IPOs could spur more because the law on foreign listings is still unclear.
Companies, investors and investment bankers have been clamouring for the longest time that Indian companies should be allowed to list abroad. Currently they can only do so under the dual listing mechanism, where the shares are first listed in India, and then elsewhere. Companies can currently list their shares via American Depository Receipts or Global Depository Receipts (ADR and GDR), a certificate given to represent shareholding in those markets, but that doesn’t work the same way as actual shares and cannot be traded as easily.
SEBI has been considering easing the law on foreign listing, but while lawyers have been expecting an update for months, there has been none. This makes the fate of domestic IPOs crucial given that dual listing has not been a popular option due to excess regulation, tax inefficiencies and the quality of companies in some cases.
“Dual listing hasn’t quite taken off so far. Laws need to be streamlined between the home country and the host country. In some cases Issuer credibility was also an issue. But dual listing hasn’t become mainstream, which is why the law on overseas listings will be crucial,” said Krishan of MV Kini.
The SPAC question
The newest listing frenzy in the US, Special Purpose Acquisition Companies, or SPACs could also make their way to India, although in no hurry. A SPAC or blank cheque company is incorporated with the explicit purpose of acquiring a company. As Moneycontrol explains here, the sole aim of a SPAC is to raise capital via an IPO to acquire a private business at a later date and then take it public without going through the traditional route of IPOs.
SPAC IPOs have raised $38.3 billion since the start of 2021, compared with $19.8 billion by traditional IPOs, according to The Wall Street Journal. The process is easier, cheaper and less regulated.
For Indian startups, SPACs are also attractive because they are legally possible, unlike a direct listing in the US. The US SPAC has to register itself as a Foreign Portfolio Investor (FPI) in India and can help take an Indian company public, because a SPAC is eventually nothing but another overseas investor, in a different form.
But SPACs may be more relevant for Indian startups incorporated abroad, such as Flipkart, Grofers and Pine Labs.
A few Indian VCs and founders have been enquiring about the possibility of SPACs for Indian startups, but no action is likely anytime soon, sources told Moneycontrol.
SPACs are also a low-key way for relatively smaller companies — not multibillion dollar firms — to go public. If the route works, it could become popular for smaller companies, which may not be able to drum up investor demand through the normal route. It could be used by a couple of mid-size venture-backed startups every year, an investment banker said, requesting anonymity.
The big picture
Investors globally take cues from the US markets to determine sentiment. And fortunes there have swung rapidly. In 2019, after Uber had a tepid IPO and WeWork’s listing plans went spectacularly awry, startup valuations everywhere were expected to take a beating.
A year on, hospitality firm Airbnb and food-delivery firm Doordash’s IPOs surpassed the wildest expectations, and tripled their market cap on listing. Sentiment seems to have shifted. So, where does that leave Indian startup IPOs?
The first couple of domestic IPOs could set the stage for a number of things. Where valuations settle could determine whether other privately held unicorns can continue commanding rich valuations or whether there will be a correction. Successful listings could also mean that direct listings abroad, while still important, may become a lower priority for some companies. Most importantly, it could shape the narrative and decide the legitimacy of the startup ecosystem at large for years to come.
