Note to readers: Hello world is a program developers run to check if a newly installed programming language is working alright. Startups and tech companies are continuously launching new software to run the real world. This column will attempt to be the "Hello World" for the real world.
For many years now, Indian startups have asked for the government to relax norms for them to list their shares in the public markets. Mainly, there are two points they’ve asked the government to look at: can we list overseas without having to list in India first? And can we list in India even if we aren’t profitable?
Until now, Indian companies could not list overseas without listing in India. To be able to fully list for investors in India, they need to show at least Rs 15 crore in profits for three years leading up to the initial public offering. And most Indian startups are unprofitable. In short, capital from public markets is practically inaccessible to Indian startups. That is likely to change now.
Investors in the US and more mature advanced markets like Singapore are wealthier and supposedly more experienced in investing in tech companies. After all, they've backed several tech companies including Amazon and Tesla that didn't turn profits for many years.
After the government's announcement to relax listing norms this month, it was encouraging to see several startup founders in India come out and speak to the press about their plans to go public. These companies may even get to ride on the credibility built by the previous generation of technology companies from India. The likes of Infosys and Wipro, which have held themselves to higher standards of corporate governance and accountability, have also delivered consistent value to shareholders. In all, it’s a positive development for the startup ecosystem.
But all this means Indian startups will have to subject themselves to greater scrutiny, and better accounting practices. Scrutiny, like how Chinese company Luckin Coffee or how Theranos faced. These startups fell apart when analysts and reporters dug into their business and uncovered fraudulent practices. The prevalent "fake it till you make it" mindset needs to go and several companies, cavalier about related party transactions and loose accounting practices will not only have to work within laws but also have to hold themselves to higher standards of ethics and governance.
Overseas investors may not care about companies being profitable at the time of listing. But they will closely watch unit economics, cash flows and want to see a path to profitably. On these counts, Indian startups fail miserably.
Better still, if they have growing cash flows from operations (not funding), the hallmark of a well-run company. Alas, what you will see in several of these companies is a jagged bottom line that points to flawed business models and unbridled cost of growth fuelled by successive infusion of private funds that make up for insufficient cash flows.
While overseas markets have been generous to several loss making tech companies, it has also punished companies like WeWork and Uber, indicating that investors can see through flaky companies whether they’re in India or in the US. So until these challenges are deftly dealt with, it may be prudent that Indian startups bide their time, build sustainable companies, and stay private.Jayadevan PK is a former technology journalist and recovering startup founder. He now works with Freshworks Inc as an evangelist, focusing on efforts around brand building. He’s also a commissioned author at HarperCollins.