Zerodha co-founder Nithin Kamath.
Over a dozen start-ups are making a beeline for a stock market debut. The per-IPO (Initial Public Offering) fund raising rounds are giving them much higher valuations, raising the expectations of even higher market cap at listing. Moneycontrol’s Nisha Poddar caught up with Nithin Kamath, Founder & CEO of Zerodha, an immediate beneficiary of the digital thrust during COVID times fired by market buoyancy and liquidity flows, on his views about the start-up IPO frenzy.
You have been a beneficiary of not just digitization in COVID times, but also of the kind of liquidity flush that the market has seen. How do you see the start-up IPO frenzy?
Absolutely. We have been a big beneficiary with all these IPOs. I think they will continue to help our business because one of the big challenges for us brokers in the country is that today's millennials don't have products that they consume, which is listed on the stock exchanges, right, so, it's very exciting for us that companies that are about to IPO can potentially expand the markets, you know like the way banks did it in the US. Maybe you know that'll happen in India. So, yes, it is exciting.
With the kind of valuation expectations by these start-ups, will there be any value left on the table for the investors in the public market?
I am a little concerned about valuations because, while historically, a lot of these investments have worked out, I think a lot of these investments if you look at the start-up ecosystem that folks are listing, you know they're almost valued for perfection. And personally, I think, you should leave something on the table for the retail investor because the retail investor essentially is the one who potentially can take the least risk in this ecosystem, as compared to writers and other private equity (PE) guys, VCs (venture capitalists), all of them. You know they're wired to take those threats. Now that you're going public, I think it's important for the companies and founders to remember that IPO is not because the founders are constantly ingrained on this whole idea that IPO is an exit; founders are constantly wired to the IPO.
But I think it was really the right beginning because now you are obligated to retail investors who can take the least risk. I think it's important to leave some value on the table, so that they're covered. Like I said, the way companies were valued in the past is very different to the way companies are valued now. Today, most businesses are valued based on growth. If the growth were to disappear, the valuations can drop off a cliff, so that's a little concern with some of these companies I have.
Many believe that the ground realities are divorced from the kind of valuations that the equity market is giving right now. How do you see the frequent fund infusion and fundraising rounds by the start-ups heading for an IPO?
Today, I think most of the valuation for start-ups come because of the growth, right. And it's very important to spend money to grow fast, because there is a cost of acquisition of customers and today, you know, start-ups who are number one-number two in any industry, get a valuation premium as well. So it's important for all start-ups to be in that number one, number two spot, and a lot of times, to be in the number one-number two spot also means that you have to spend a lot of money and typically, most of these races are won by people with the deepest pockets. So yeah, you must continuously keep raising money, so that you can continuously outspend your competition to stay ahead of the race, just to keep continuing to go faster.
So, like I said, I don't know if markets are mature enough to understand and value businesses like this but that's how private markets are valued today. And some of these newer companies are listed in the US. I mean they have got to be profitable, they're growing fast, and the market understands how to value these companies so it'll be interesting to see how, over the next one year when all of these start-ups list out in public markets, you will know, will it start appreciating growth, as much as, say, a price to earnings?
What is the factor that can really spoil this party?
I think one of the flexibilities and one of the reasons for our growth is the nimbleness we have as a start-up. Right, I mean the ability to quickly move directions and pivot and, and all of that is one of the reasons why I think the start-ups in India or essentially anywhere in the world have been taking on incumbents and beating them to it. But the issue with IPOs is that you will end up losing the flexibility and the nimbleness. You know, as a company grows as fast as you're growing, when you don't really have all the obligations that an IPO brings and the issue is if you don't grow fast, the valuations will take a hit.