SEBI Bhavan, Mumbai. (Photo by Jimmy Vikas via Wikimedia Commons CC 3.0; image cropped)
After the first two decades of the 21st century, Indian venture capital markets finally pay heed to the most important one ever - the 2020’s. On the verge of a Zomato initial public offering (IPO) and PayTM mega-IPO on the Indian bourses this year, it will be a turning point for the criticism that we have too many Unicorns in India, but almost none that can stand up to the scrutiny of public markets. The floodgates may open but the founders need to rapidly build their playbooks.
The Indian VC investing story has now completed 15 years (not counting the handful of companies that were born around 20 years ago - MMT, InfoEdge (Naukri), etc). Despite the accumulated investing wisdom that the market has learnt over time, the VC space is getting concentrated on both sides of the coin - investors on the cap table as well as the market dominance of the unicorns. That said, the first four months of 2021 have added as many Unicorns as all of 2020. Clearly, the venture market is voting that tech is one of the largest transformational drivers of the post-Covid economy. Will the public markets vote in the same direction?
In the same 20-year period, the domestic public markets have grown multi-fold. Technology capabilities, a lower minimum investable corpus and regulatory safeguards for consumer protection have meant that more individuals now access and invest in the public markets. However, both the understanding of and access to new-age tech companies have been elusive.
The big question is this : “Will the newly-anointed poster children of Indian tech develop the playbooks to be stellar corporate-citizens, in their to-be-public-companies avatar?”
Public markets and pressures
The size of the Indian public markets is estimated at USD 2.7 trillion (over 85% of Indian GDP). There is a sizeable retail investor participation and growing awareness about the listed companies. Of late, the market is also seeing investor activism, demanding better governance from the companies.
The main distinction between private and public markets is the liquidity of the investment. It is virtually impossible for an investor to exit a private investment before it matures to the next step function of valuation each time. Occasionally, earlier investors do get secondary exits from later stage growth VCs and PE investors who want to consolidate ownership. Listed shares, however, if in the mid- to large-cap stages, can be easily resold at any time; technically even within a minute of having purchased the stock.
For privately-funded entities, giving an exit to their strategic and financial investors is a must. While later-round investors are happy to be “passed the parcel”, especially in unicorns (a moniker for private companies that are beyond the $1 billion valuation point), this is not a fool-proof mechanism of solving long-term needs of liquidity and price discovery for later-stage investment firms. It is only the public markets which will give such a liquidity cushion to the aggregate venture market. The US provides ample testament to this cycle - most meaningful acquirers in tech are companies which were once venture-funded but are now very large public companies.
In India, such large tech public companies don’t exist yet. The acquisitions have been led by private tech companies that are VC-funded and loss-making themselves. With exceptions, most of these have been distress sales. More founders realise that one needs to build market leadership and unicorn status, or risk getting acquired cheap.
Being public is a tough ask
Public markets will validate prices for the first time. It means founders who have dealt only with 10-20 investors so far on their cap table, will need to deal with their new found realities, with limited abilities to influence the outcome, outside of their quarterly scorecards.
Public markets will demand granular data / information disclosures. So the private investor who probably gave a scarcity premium and enjoyed the information arbitrage, might suddenly discover if it was all worth it!
Public markets demand high governance and consistent business (growth) performance or cycles. Public markets do not like highly volatile business performance. On the brighter side, for a business to consumer (B2C) brand going public, it would mean enhanced branding visibility, which could be leveraged for better revenue traction and (potential) increased consumer engagement.
Accessing public markets is not going to be an easy task, relative to a private raise. It is also not about simply hiring an investment banker and lawyers, to help you with pre-IPO filings and getting the stock listed on the bourses. It is the beginning of a very different multi-year journey with investors, one that will demand a lot of introspection, a massive upgrade of governance processes and behaviour, more scrutiny on one’s public personas, and a culture change in young hot tech startups under this new glare.
Going public would need rigour and discipline of meeting the key investors / large shareholders / equities analysts every quarter. This could mean time away from the core business, depending on the number of days spent per quarter in this activity.
There are of course incredible benefits to an IPO, too. Being listed builds better liquidity and helps in attracting (mid to senior) talent with (listed company) ESOPs (employee stock options). It also derisks the scenario of a single large investor needing to exit, if you were in the private space.
Another key requirement would be to enhance the talent bench. Boards will now have to advocate differently:
- Bring adequate senior- and mid-level management talent who have prior public market experience.
- Don’t just hire them because they have that experience. Hire them because they have the cultural fitment and conviction about your proposed journey ahead.
- Every event has multi-faceted PR ramifications.
And the list goes on.
It is a common fallacy that merely using a tick-mark hiring approach and offering large compensation to do “trophy hires” would pay off for adding management bandwidth. It won’t help anyone in the long run. Hiring such lateral talent would yet need time and attention span of the founders. If any such CXO hires backfire, it may only help a CFO (chief financial officer) or IR (investor relations) head who can flaunt the tag of “taking startup to IPO” in their CV, but it could leave the founder-CEO struggling with too much to manage; and with newly formed (negative) perception if the founder can indeed manage experienced individuals.
Building a playbook, but not risking it becoming a rulebook
It will soon be upon the unicorn universe to script a go-to-IPO playbook for India.
Indian startups have highly energetic young founders. Most of them have not seen any leadership role or regulatory role before this particular startup stint as a founder. Their mentor or lead-investor (VCs) would not have seen many such founders whom they have backed; they would have learnt what works, what does not work, and what’s to be done in different scenarios. The VCs, too, will need to rapidly learn as the ecosystem matures. They would need to upgrade the skills and learnings across scaling, capital raising, human capital development or attracting critical and crucial talent, strategic communication to the external world, etc. Once they do, it will require a rapid porting to the next of the portfolio that will get there. Most VCs are building Capital Markets Leadership within their firms too now.
It is no surprise that Zomato has been an early mover in its courageous first step towards an Indian IPO. After all, InfoEdge (Naukri’s parent company) was the early backer and largest supporter of Zomato, and Sanjeev Bikhchandani (the founder of InfoEdge - arguably one of India’s finest run and most valuable public Internet companies) is a solid mentor to Deepinder Goyal, the CEO and founder of Zomato.
Adapt the best playbooks. Do not risk a blind copy-paste
Don’t go to public markets if you are not yet ready for scrutiny - of your behaviour, of your business, of your books, of your public statements and of your leadership.
Copying some other competitors’ forays into public markets blindly won’t help. Each business is unique and has its USP. Public market access is about the right timing and all the preparedness advocated above.
You will go from having mostly investor nominee directors on your board to dealing with independent directors with diversity of experience and backgrounds. While you might end up choosing the right set of such candidates, over time, the public markets will reward and punish you based on the performance of this set of candidates. You don’t want “yes persons” on your boards.
The same set of media journalists you could personally interact or influence with your poise and pitch before an IPO might be a different act now. Those who cover listed companies are tough as nails journalists who know their finance and math. Performance disclosures every quarter would be dissected sharply. So the poster-child image could be under severe scrutiny by an entirely new set of market actors.
Global investors have long complained about Indian tech’s moment that is yet to arrive: large scale exits for all the capital that went into building the ecosystem of winners. That seminal moment has arrived. It is up to the collective ecosystem to be accountable to this responsibility and outperform.
Play books and poster children are important for figuring out the approach for sustainable growth and to unlock value in public markets. As a sports coach put it, “Pressure is a privilege.” Let the show begin!Takeaway: Highlights of the new playbook
- The “founder” tag is not that material any more to the market. Clear segregation of roles and responsibilities of the new “KMP” (key management personnel), especially since founder(s) is/are simply part of the KMP.
- Disclose all related party transactions upfront and unwind those transactions as much as possible. Public markets dislike conflicts.
- Develop market-acceptable governance frameworks.
- Get adequately well diversified competencies and varying expertise in building your board of directors, including the right mix of women directors and independent directors.
- Create granular template for your disclosures and stick to it.
- Avoid making generous forward-looking statements or grandiose projections.
- Let the market have visibility into your business and your core team members as run-up to the IPO and post-facto as well.
- Designate a senior leader accountable for each major deliverable in the run-up to the IPO. Remember, it’s a symphony that a founder has to orchestrate and not a solo music production!
- Build a consistent communication pattern / calendar with all external stakeholders. Adhere to the pattern and stay disciplined.
- Establish an investor communication mechanism to receive regular and unfiltered feedback from various stakeholders quarters. This will help you communicate better for those missing gaps and perceptions that need addressing.
Karthik Reddy is co-founder and managing partner, Blume Ventures. Srinath Sridharan is an independent markets commentator