Rahul Agarwal
India has been ranked third in the global startup ecosystem, as per a recent KPMG report as the number of startups in the country grew 7x in a decade -- from 7,000 in 2008 to 50,000 in 2018.
While looking at the funding trends, the startup ecosystem in India in the first half of 2019 has recorded a total funding of around $5.85 billion, which is 16.64 percent higher than first half of 2018 ($5 billion). However, it pales in comparison to the total funding recorded in first half of 2017 ($6.89 billion).
Although the deal value increased in first half of 2019, there is a downward trend in the number of deals in first half of 2019. The deals during first half of 2019 (360 deals) were 26.23 percent less in comparison to first half of -2017 (488 deals) and 16.47 percent lower in comparison to first half of 2018 (431 deals).
The number of startups have grown steadily due to an overall positive policy framework and incentivisation, but from valuation and fund raising perspective things have gotten tougher.
Poor exits, declining valuations, troubled investments and funding squeeze have become a recurring theme.
Although private funding to the startup ecosystem is still steady, Indian startups have yet not been able to mop up funds through the IPO route.
For example, the BSE had launched its startup listing platform in December 2018, to facilitate funding for the deserving startups by enabling them to raise capital from the market, but it took 8 months after the launch to get its first listing.
Alphalogic Techsys Limited (Scrip Code: - 542770) and Transpact Enterprises Limited (Scrip Code: - 542765) are the only two stocks which had listed on September 5, 2019 on the BSE Startup platform.
Globally, private capital is slowly starting to dry up -- as that changes entrepreneurs will realize that it is important to opt for an IPO even as a source of funding.
Moreover, venture capitalists are seeking exits which don’t come that easily through a merger and acquisition, which is why IPOs would become a way for investors to exit.
But, with the current economic slowdown and failure of few unicorns, there is every chance that some startups may be forced to tread their path towards IPO little bit more cautiously.
Even the profit seeking existing investors may force their portfolio companies to delay their IPO launch if the mood in Indian markets continues to remain dull in the coming years.
In the next two-three years, it is expected that a spate of IPOs will hit the markets as many high profile Indian startups would opt for IPO listing.
This may include unicorn startups like Ola, Oyo, Freshworks, Delhivery and Druva. Even non-unicorn startups like Pepperfry and Smaaash are expected to try their luck in India’s capital market. However, the valuation bubbles backed by unhealthy balance sheets may force most unicorn Indian startups to delay their listing plan.
Over the last two years the number of unicorns (generally valued more than $1 billion) has nearly doubled, reflecting the surge in investor appetite for large, fast-growing companies, but in the absence of a clear path to profitability exiting these investments would prove to be challenging.
Most valuable Indian unicorns such as Paytm, Oyo, Ola, Byju’s, Swiggy and Zomato are all facing their own long-term challenges that make the possibility of accessing the capital markets remote.
For instance, Paytm is struggling to maintain its market leadership as rivals Google Pay and PhonePe, owned by Walmart spend hundreds of millions of dollars to increase their share of digital payments. Its bottom line does not paint a pretty picture either. Paytm’s losses widened 165 percent in the last financial year while revenue increased marginally that is just 8.2 percent. Paytm’s parent One97 Communications posted Rs 3,959.6 crore in net losses for the fiscal year ending March 31, 2019 against Rs 1,490 crore for the same period in the previous year.
Food delivery startups, Swiggy and Zomato are locked in an expensive market share battle that shows no signs of letting up and that has caused significantly higher losses at the two companies. Zomato, in its annual report FY19, said that the company’s total cost has increased from $80 million (Rs 560 crore) in FY18 to $500 million (Rs 3,500) in last financial year. Zomato’s losses for FY19 stood at $294 million (Rs 2,058), most of which came from its food delivery business in India.
Bengaluru-headquartered ride-hailing company Ola is facing similar problems, the company is locked in fierce competition with global giant Uber, although the company has pared back its losses but the path to profitability is still not visible. Ola plans to go public in less than two years after meeting profitability goals required for such a listing in India.
Similar is the story for Oyo -- another unicorn which has taken off on an unprecedented expansion spree globally that will require heavy investments for many years to come. Oyo is yet to prove that its business model can become profitable, even in its older markets such as India.
The biggest hope for the Indian startup ecosystem is from Flipkart, the one unicorn with the loftiest valuation. However, even in the case of Flipkart, the story is more or less the same. Fierce competition from a global giant plus the race to acquire market cap at the cost of profitability does not paint a rosy picture in terms of profitable exit for its acquirers. When Walmart bought Flipkart, it announced that it will seek an IPO for Flipkart at some point but given the fact that Flipkart is expected to continue investing billions of dollars in expanding its business, it would be difficult for the company to attain profitability in the near future, hence an IPO will remain a pipe dream for quite some time.
In addition to business woes most Indian startups would have to face another set of regulatory challenges if and when they decide on coming out with an IPO.
Major Indian exchange requires companies to be profitable for at-least three years before they can go public. In addition, for direct listing the exchanges require that the promoters should contribute at-least 20 percent of the total paid-up capital of the company which is not the case for most of the Indian unicorns.
Therefore, unless there is a change in regulation these startups would require a takeover by a bigger company which has the balance sheet to come out with an IPO.
Recent events, in particular the Uber IPO and WeWork’s IPO fiasco in the US demonstrate that there’s a meaningful disconnect between private and public valuations. Trends suggest that globally investors have begun to question the wisdom of growth-at-all-costs approach and are not willing to invest in companies which do not have a clear path to profitability.
These events, could mark a turning point in the startup universe globally, it appears that the days of extremely lofty valuations and limitless funding of losses are finally over. Investors are increasingly getting wary about the valuations assigned to these marquee Unicorns. The one sure lesson that Indian startups can derive from string of bad IPO launches in the US is that it is all about ‘balance sheet.’
Only those Indian startups with manageable debts and losses and sustainable revenue model can convince investors to take a gamble in their IPOs.
(The author is Director at Wealth Discovery/EZ Wealth.)
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