As the founder of a Mumbai-based early stage fund, I have encountered a recurring question at limited partners’ meetings over the last eight years: “Why aren’t there more IPOs in India?”
As people who give us the money, limited partners (LPs) set strict timelines for venture capitalists like us to generate returns on our investments. A healthy path for Indian VCs to cash out of their startup investments is the IPO route, and yet it is uncommon in India.
LPs in Shanghai and Hong Kong, whom I met earlier this year, cited dozens of Chinese technology startups that had made their market debuts on the Nasdaq. I was asked: “Why aren’t Indian companies doing the same?”
Unlike their Chinese counterparts, lack of profitability is a major constraint that stands in the way of Indian startups’ public listing. The last Indian startup to list on the Nasdaq was MakeMyTrip in 2010. I had to admit to the LPs: “Almost no Indian company, unicorn or otherwise, is in a position to make its financials public, let alone chart a clear path to profitability.”
And yet, without young firms demonstrating their “public listability,” all claims of India possessing a robust startup ecosystem will remain hollow.
No substitute for an IPO
One major reason for the dim listing prospects of Indian startups is the trend of staying private through backing from mega funds like Softbank or Naspers, which have deep pockets and long investment horizons.
The wisdom of their invest-at-any-valuation approach, though, must be questioned.
Lot of good Indian companies can turn profitable without becoming overvalued unicorns and launch an IPO sooner. This is a better alternative to perpetually seeking private growth capital, where there is little compulsion to generate profits.
To be sure, there have been a handful of successful startup IPOs in India over the years: Info Edge, Just Dial, Matrimony.com, Quick Heal, and more recently IndiaMART. The results of these companies going public have been mixed, but they are sustainable, long-term businesses.
From my recent interactions with founders of the SaaS startup Freshworks, and e-commerce marketplace Snapdeal, I have gathered that they seem set to follow the same path. OYO and InMobi, too, have indicated their intent towards an IPO, and so have Quikr, Pepperfry, Ola, and Paytm in recent weeks.
However, despite all its merits, engineering a successful IPO is no walk in the park, especially for an overvalued startup.
Not an easy path
The bigger a startup’s valuation, the tougher it becomes for the stock market to sustain it post an IPO. This explains the relative disappointment that Uber, Lyft, and Pinterest faced after their IPOs. The latest addition to this list is the frothy WeWork, which is selling “elevation of the world’s consciousness” more than its financials to a very cynical US public market.
Then, there is also the difficulty of managing a company under the public gaze, which is quite unlike running it privately. I’ve seen a fair share of companies spurn acquisition offers for the IPO path, only to watch their share price drop by 50% after listing.
However, these challenges persist even in other exit routes like M&As. If VCs seek a cash payout through an acquisition, the buyer will inevitably be prone to applying similar valuation benchmarks as that of a listed company.
M&As are indeed a critical engine for the recycling of capital, and the transfer of innovation from smaller companies to larger ones. But to assume that people will pay for an Indian company that does not have the fundamental tenets of world-class innovation is a naïve and short-term escapist view for the VC market to take.
VC investors, therefore, must be able to cherry pick founders with a “listing mentality.” Employees, customers, vendors, and public market investors want to engage with a “listable” company. Hence, founders’ mentality, minus the listing mentality, is unlikely to result in best-selling memoirs.
Founders must approach the long game of entrepreneurship with a mindset to build a publicly listed company, a lasting company—the journey, irrespective of the outcome, will always be one to cherish.
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