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Paytm IPO and Beyond | Reality check on the listing of new-age companies

The new-age companies trade based on projections, and not the past performance. There are a lot of assumptions to be proved, unlike projections of traditional companies which have a proven business model 

November 23, 2021 / 05:58 PM IST
Paytm

Paytm

We live in exciting times. Stock markets scale Himalayan heights, and unicorns are born on a daily basis. The world is awash in cash with trillions of dollars printed before and during the COVID-19 epidemic. All the cash had to end up somewhere, and it has ended up in the riskiest corners of the market — startups, cryptocurrency, and equity markets.

China's regulatory crackdown on tech giants, and the increasing focus on their domestic market has led to a lot of liquidity washing up on Indian shores. No wonder the Nifty scales new heights, no wonder all startups aim to become unicorns, and no wonder private companies are rushing to go public. No one knows when the music will stop — till then let the party go on.

Zomato started the tech IPO party with Nykaa zooming straight out of the gates. Investors were sure that every tech IPO would do well, and post double-digit gains on the first day itself. Valuations did not seem to matter. Companies were going public at 3-4 times their last round valuations in the private market, which in itself was overheated. Reality had to set in, and it did pretty fast and brutally with the Paytm IPO.

Since then, social media has been flooded with debates, jokes, memes, sniggers, and expert comments on the IPO. Overnight everyone was an expert. The comments ranged from sharp criticism of the business, the founder, the IPO pricing, the selling by early investors in the IPO, to attacks on the founder, and the investors.

I am neither an expert nor an active player in the stock market, so I don’t know and can’t comment on what will happen in the coming days. It is best left to Dalal Street pundits to opine on this. I, however, will touch upon some of the issues that have been thrown open.

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Pricing Of Shares At IPO 

If you price it low, you are seen as short-charging existing shareholders by leaving money on the table. If you price it high, you leave less for the new investors, including retail investors, and the stock will not pop at the IPO. There is no right or wrong decision here. It is a call taken by the company, the board, and the investors on the recommendation of the merchant banker. No one wants the share price to tank on listing.

Winning A Lottery

Of the total IPO size, 75 percent is reserved for qualified institutional investors. Of the remaining 25 percent, 15 percent is blocked for high net worth investors (HNIs), so, only 10 percent of the issue is available for the retail investor leading to heavy oversubscription.

There is a huge herd mentality, like applying for a DDA flat allotment in Delhi, or like booking a Maruti car back in the day — if you get an allotment, you make good returns, otherwise you get your principal back. Essentially, it is like buying a lottery ticket, with the interest you would have earned on your booking amount for the two weeks being your cost of the lottery ticket, and the prize won being the gain on the amount you get allotted, in case you get any.

Buy The Stock On Listing Or Hold On To It If Allotted?

This is a key question. The new-age companies trade based on projections, and not the past performance. There are a lot of assumptions to be proven, unlike projections of traditional companies which have a proven business model, where the growth is a lot more predictable, the product-market fit is established, where there are real assets that generate profit, and there is an existing ecosystem of dealers, distributors, supply channels, track record, and momentum.

If you have the stomach to wade through these uncertainties, one can consider investing in such new-age companies. The results can be different from investing in standard, proven, FMCG and bank stocks — it could be a roller coaster ride with disproportionate highs and heart breaking downsides.

Over the next few years, I expect these companies to form a much larger portion of the stock market index, capture a large portion of the market cap value creation and, therefore, provide a good opportunity for wealth creation for the retail investor.

Primary Capital Raise Vs Offers Of Sale

A lot of noise is being made on the point that many companies are coming out with IPOs where most of the money raised is for buying shares of existing investors rather than for investment into the company. It is seen as a signalling issue, especially with regard to the IPO price. If it is attractive, why are insiders selling?

This is perfectly fine. First, if the company business model, going forward, does not need much capital, it is a good sign, it means the risk is lower, and the company can navigate turbulent times ahead. Contrast this to a situation where a company is bleeding money and needs further, future fundraises to sustain itself.

Second, investors have their fund life, time horizon, and stage focus. Early-stage investors or even hedge funds have to exit, and an IPO is one good time for it. It does not matter what price; they cannot invest even if the price is attractive as their fund investment life period may be over.

Their exit at the IPO stage is no indication of their confidence in the company. Selling a large stake, even in smaller chunks, after the IPO is difficult — it cannot be done in the open market without affecting the price, and there is a lock-in period too.

So, don’t judge the IPO by whether it is primary capital raise or an OFS.

No Personal Attack

It is natural to be disappointed if you apply for an IPO, get an allotment, and the stock falls upon opening. But attacking the founder for being happy at the listing, celebrating the IPO with the team, or justifying the IPO price is unfair.

Just as you would take credit for identifying, applying, buying, and selling any stock, and enjoying the upside, you should be willing to take the hit when the decision does not work in your favour. It is strange to see armchair critics, who have never started a company, and have never been on the field, passing harsh judgments on entrepreneurs who not only took the leap but also weathered the storm and successfully listed the company.

Vote with your wallet but no personal attacks, especially on social media.

IPO is a great milestone, and a major event for any entrepreneur, and in every investor’s life. They have every right to feel proud, and enjoy it. Similarly, they are disappointed if it fails to list spectacularly.

Schadenfreude 

I see a lot of schadenfreude with everyone jumping with glee at the loss incurred by anchor investors, and comments on how the selling shareholder at an IPO made a fool of the incoming investor, how the retail investor got conned, etc.

Scathing criticism makes for good social media visibility, the tough and mature thing is to appreciate the decades of hard work, challenges, risk-taking, and scaling in a tough environment against many odds. When you read such accounts, do take a moment to look at the other side, and at what all has happened in the journey so far.

What Next?

For Founders: Genuinely relook at the IPO price, and leave money on the table. Given the frenzied euphoria, don’t price it based on demand-supply. Don’t go for the highest possible price, but tone it down to reflect the vagaries of the market. Top pricing will please the existing investors, but it will disappoint the new investors. Resist the temptation to go for bragging rights on the IPO size, pricing and oversubscription metrics. The euphoria vanishes quickly as reality hits on the listing.

For Existing investors: Don’t push the company, management, and founder to the limit. Their journey is just starting while yours, as an early backer, is at its end.

For Merchant Bankers and Advisers: Higher pricing, and larger IPO size will help you win the mandate, but it will hurt the company, and the founder. It will hurt your track record, and reputation in the long run. Be a sounding board, and coach the company on the right way forward. Your ability to price future IPOs, and convince anchor investors will depend on past performance.

For New Retail Investors: Understand the new economy business metrics, they are very different. The risk-reward potential are different too, even as a listed entity. Understand your own appetite for risk, and approach cautiously. Take baby steps to get yourself familiar.

By all means get in. These are exciting times, and the beginning of the journey. Like with dating, don’t let your first disappointment deprive you of future joy and happiness.

The digital transformation of businesses and our lives are real. We will adopt all such products and services, and the journey is just starting. This entire sector powered by the Internet, technology, and digital tools will change the way we live, interact, and transact in the future.

Business models based on these will dominate in the future; there is value to be created, and for the retail investor to benefit.

K Ganesh is a serial entrepreneur, and promoter-BigBasket, Portea Medical, HomeLane.

Views are personal and do not represent the stand of this publication.
K Ganesh . K Ganesh is a serial entrepreneur and investor with four successful greenfield ventures and exits. He currently runs GrowthStory.in, a leading venture builder platform that promotes and incubates new ventures along with great entrepreneurs. Over the last few years, GrowthStory has promoted Bigbasket.com, Portea Medical, Bluestone.com, Freshmenu and HomeLane. His last venture, TutorVista was acquired by US and UK listed education leader Pearson for $ 213 MM.
first published: Nov 23, 2021 05:58 pm

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