What’s the one thing India’s new-age startup IPOs have in common? All of them have seen their share prices plummet after listing. The latest, Honasa Consumer, parent of beauty products brand Mamaearth, has followed the same trajectory. The stock plummeted 11.3 percent in the first two days after listing, with retail investors again facing a loss on their investment.
What are the investors getting wrong again and again?
Simply put, the problem for investors has been investing in the wrong business models, and using the wrong capital structures, with investment returns built on questionable assumptions. The ‘X For Y’ model, the holy grail for private market investments in India (early and growth stage) does not work in India due to its unique market dynamics. Investing in India needs an India-centric approach.
Also Read: Jefferies initiates Mamaearth coverage with a 'high-conviction' buy, target price at Rs 520
However, the struggles faced by venture capital-funded startups in India are not indicative of the broader market. These struggles can be attributed to various factors, with one of the primary culprits being the force-feeding of business models that were ill-suited to the Indian market. India's unique characteristics, such as its rapid adoption of mobile technology, digital payments, and cashless transactions, underscore the need for tailored business models. The failure to recognise and adapt to these nuances has hampered the success of certain investments in the region.
The enormous potential of India’s private markets
India’s top unlisted 30,000 private companies do $1 trillion in revenues and $150 billion in EBITDA (earnings before interest, taxes, depreciation and amortisation).
The collapse of the Honasa shares post the IPO shows that to boost Indian FDI, employment, and investor returns, investors and businesses must tap Indian private market companies to truly accelerate Indian growth and investments.
One might ask how significant India's private market really is. The short answer is that it is massive and rapidly growing. It’s not just about new businesses; the existing unlisted top 30,000 companies in India's private markets generate over $100 billion in profits. The time to reap the rewards is now, and investors must understand the massive potential that lies ahead. It is currently a $1 trillion market, but projections suggest it will surpass $10 trillion in the next two decades.
Unlocking growth and generating returns
New-age Indian companies need capital, but retail investors and the market in general must have confidence in these companies. The key to solving the problem is seeing the real opportunity in India, which is to find ways in which to build on the top existing 30,000 companies and then the next 30,000 companies and so on.
The key to success in India's private markets lies in identifying sectors that are growing at an annual rate of 15-20 percent and individual companies within those sectors that are achieving even higher growth rates of 30-50 percent. Investors can play a crucial role by providing the necessary capital to support the growth of these companies. The real opportunity in India's private markets is partnering with hundreds of these small, high-growth businesses.
Also Read: Mamaearth IPO: An empty vessel making loud noise?
American economic growth in the 1970s and 1980s, which led to the US becoming the dominant global economy, was built upon providing access to capital for its MSMEs through its bond, equity and platform structure markets. The MSME cable companies laid the foundation for the development of the internet, which eventually led to Facebook, Amazon and Google. The small cable operators in rural Colorado laid the foundation for the epic American Internet economy aided by liquid, deep and rewarding capital markets.
Sowing the seeds for future rewards
To really create new-age internet businesses that can build lasting business models, create value for VC investors and let retail investors reap the benefits, India and its investor base must empower the 30,000 Indian private companies and their like. These smaller companies exist everywhere, from rural cable to information services to auto ancillaries.
India’s growth story is the most important globally in the 21st century, and those who embrace this story stand to reap epic rewards in the not-too-distant future. As Warren Buffett's timeless wisdom reminds us, true treasures lie in simplicity and overlooked opportunities. India’s private markets are a testament to the untapped potential of the “missing middle” that holds the key to unparalleled success.
$1 trillion in revenues and $150 billion in EBITDA is what these companies bring to the table. The future is Indian MSMEs driving the next phase of growth as India strengthens its position as an economic powerhouse to be reckoned with. For India to build the next generation of Internet businesses, investors must realise that the most important factor is building on the existing $1 trillion smaller companies in the country. Indian private markets are the goldmine and key to unlocking true value in the great Indian consumer market.
(The writers are Founders and Principals at AltG. The views expressed are personal)
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