Mohandas Pai On Indian Startup IPOs, Crypto Boom, Reliance & Tata’s Super App Ambitions

Busting the IPO myths that surround the Indian public market, a couple of startups, including Nazara Technologies and EaseMyTrip, have listed successfully in 2021. What’s more, an IPO storm will hit the market soon as the likes of Zomato and CarTrade have already announced their IPO ambitions and filed the draft red herring prospectus (DRHP). Paytm is also planning India’s largest public market debut with a $3 Bn IPO (at a valuation of $30 Bn) after receiving in-principle approval from its board. Other prominent startups such as Policybazaar, PharmEasy, Nykaa, Delhivery and ixigo are also looking to list by year-end.

Besides a slew of startup IPOs, 2021 will also be the year of the unicorns and will witness an unprecedented crypto boom in India. According to Mohandas Pai, partner at Aarin Capital and former Infosys CFO, India will mint at least 20 unicorns this year, and 150 unicorns by 2025.

In an interaction with Inc42, Pai spoke on the latest trends across the Indian startup ecosystem and their impact in the long run. Here are the edited excerpts.

Inc42: Dozens of IPOs have been lined up to hit the market soon. Has this been triggered by the pandemic or is it part of the startup lifecycle?   

Mohandas Pai: When the pandemic struck last year, we saw many new products and IPOs in the US. There was a liquidity burst as the Federal Reserve loosened (its policies). It led to an upsurge in the market, and a lot of companies did IPOs. As a result, a large number of venture capitalists (VCs) made a lot of money through exits.

This year (2021), Indian companies are also asked by their investors to consider an IPO seriously. The Indian IPO market has done well in the past 12 months, and a large amount of money has come in. Plus, these startups have grown to a size when IPOs make more sense. After all, if you want to be a category leader, you must have a fair-sized IPO that creates liquidity, say, more than a billion dollars. If that happens, all global investors looking out for good investments will come and invest in you. So, the expectations are really high. These companies had seen good growth when the pandemic receded. And they felt that the timing was right. So, I think everything is falling into place. That is why more and more Indian startups are looking at IPOs.

Inc42: How did the Indian market respond to tech IPOs earlier?

Mohandas Pai: My personal view is that the market has always given good valuation and good treatment to high-growth companies as high growth leads to high earnings. It is only the mindset of investors and startup founders that has held them back (from IPO).

But equity markets are all about growth. The rise in capital flow,  the rise in liquidity and the success of many companies, coupled with the relief of coming out of Covid, are creating a wave of optimism, which will help these companies tap into public markets. In fact, more and more startups should do this. This will give them access to a large pool of global investors, leading to tremendous liquidity and excellent brand building. These investors create transparency and bring better valuation because the stocks are traded and valued every day. They create a level playing field for startup founders.

Many founders sign one-sided investment agreements. They sign away all their rights. Maybe rightly so as these are all private companies, and investors do not have much protection because they cannot get out easily. That is why they need that agreement. But when you list, all those agreements and one-sided contracts fall away. If you do well in terms of growth, you can easily access more capital. The advantages of an IPO are many all over the world. But the timing has to be right because the market is in your favour when growth is in your favour.

You must remember that you will always raise capital when the markets are giving you the capital and not when you need it. You have got to be prepared for an IPO.

Inc42: SEBI has already made certain changes in IPO-related regulations. Should it do anything more, especially in the context of tech companies?   

Mohandas Pai: In the last year, SEBI has come out with very relaxed norms and innovative growth platforms that many startups can use. This gives them great flexibility. It has also proposed a reduction in the lock-in period for 20% minimum promoters’ contribution (one year instead of three, which is the current practice to ensure that controlling shareholders cannot offload their holdings immediately after the IPO). So, overall, the regulations are very good and in the right direction. I have not heard anyone complain about them.

Inc42: Startup IPOs are not the only trend around. Corporates behemoths like the Tata group and Reliance are also on a startup acquisition spree. What do you make of it?  

Mohandas Pai: Indian corporate sector is behind the curve when it comes to investing in startups and agile innovation. In the past two-three years, they have noticed how startups grow rapidly, attract a lot of capital and become serious threats to incumbents. That is why Indian corporate houses invest in sector-specific startups where they want to grow their own businesses. Reliance acquired a lot of companies and created a super-app. The Tatas have recently purchased a lot of companies to grow their business here because the group has not invested enough in digital technologies in India, and the market is going digital. Similar is the case with Hero and other companies investing in mobility startups.

Simply put, when they see waves of innovation coming, they stay away because they are making a lot of money doing whatever they are doing. But when they see that the new players will impact their business, they wake up and try to invest in them or buy them.

Today, startups have become a major force in Indian economy. They are threatening incumbents; they have introduced new business models; they can attract huge capital and grow rapidly.

Today, the entire country is digitised, and almost everyone uses a smartphone. All these are changing the nature of the market, and the Indian corporate sector is playing catch-up. Had they invested in startups a bit earlier, maybe three or four years ago, and helped them grow, they would have been in better shape. But that is typical of corporate houses. Now that they have realised that their businesses could be hit hard, they are making efforts to be part of this digitisation process and innovation wave. So, they are beginning to invest.

It will take them a long time to get into the competition mode. It is because they do not want to take risks and achieve everything without any delay.

Inc42: At what stage or phase should startups consider acquisition deals?

Mohandas Pai: There is no right or wrong phase/stage. Please remember that the idea of business is to make money. If you have invested in a business, you make through an exit, be it an IPO or an acquisition. It is a two way-street, and you have to accept that.

So, when you accept the exit, you make money. You can liquidate. But overall, there is no right or wrong time. It is just that there has to be a buyer and there has to be a seller — these are the two important things.

Inc42: India has emerged as the fastest-growing unicorn hub. Does it also indicate that a lot of money is chasing a few companies?

Mohandas Pai: I think that the world has changed after the pandemic. The digital revolution has reached the banking sector. And VCs are waiting in the wings to find out who will win and who will lose.

Right now, VCs are clearly picking the winners and giving them large amounts of capital because during the Covid-19 pandemic, all these companies have grown and the investors want them to grow much faster. So, it is all coming together. In fact, a large amount of capital is yet to come.

India will have a minimum of 20 unicorns this year. But it can turn out to be 20-25, including the ones coming from IPOs. And by 2025, we will have 150 unicorns.

Inc42: The second wave of Covid-19 is receding, but experts warn us that a third wave could be just weeks away. What should startups do to stay prepared for such an eventuality?

Mohandas Pai: The government has vaccinated 250 Mn so far. And by August-end, another 250 Mn will get the jab. So, the third wave will not be as big as the second. Besides, if you look at the 100-year-old data (on previous pandemics), you will find that the second wave was the most dangerous, not the third wave. But that is what the data reveals and we do not know whether the same thing will happen now. However, people will feel more confident after getting vaccinated.

In all likelihood, the future will be bright for startups, the economy will revive and investments are already coming back. India is going through a massive investment cycle once again, maybe after five or seven years. All these augur well for startups. Yes, many SMEs and startups have shut down during this period, which is good in a way, as they can recycle the capital and come back in a new avatar; they can do something different. All of us have gone through this pain, but the pain will lead to bigger gains for India. I think we are beginning to see that already.

Inc42: How do you see Covid-19 impacting the Indian economy, especially in the long term?

Mohandas Pai: The economy will grow between 7.5% and 9.5% — that is the consensus today. Earlier, it was pegged at 9.5-12.5%. I am sure it will be revised upwards in the next two-three months as we see economic growth. I am very confident about this because the capital expenditure-capital investment cycle is coming back. Steel plants want to invest more; cement plants are monitoring the scenario and infrastructure development is on the rise. Other manufacturers want to invest because they are finding good growth. A ‘supercycle’ commodity cycle is coming up worldwide that will keep the money flowing to all these traditional companies.

So, we are seeing a massive boost in terms of growth and excess liquidity in the system. Now that as easy Money contagious means greater availability of money for capital expenditure and growth initiatives. So I am optimistic that growth will be pretty good this year, and next year will be even better.

Inc42: India is moving fast towards crypto, but regulations are not. What should be the way forward in this case?

Mohandas Pai: Crypto has become a global phenomenon, and people are chasing crypto assets in the hope of making good money. Also, blockchain, the technology behind cryptocurrencies, is a bedrock technology and has got multiple uses. But the initial idea that you can mine crypto and use it as a currency for payments is gone. Nobody wants to use crypto, say bitcoin, for payments. They are holding it as an asset class similar to gold.

There is still some glamour around crypto because so many people are trying to put their money in it. However, most people are not sure what is going to happen in India. Therefore, they use the liberalised remittance scheme (LRS) to invest in crypto and do it outside the country, as the Indian government has not allowed it here for various reasons. To start with, crypto is extremely volatile. We have not seen this kind of volatility in any asset class for a long time. I think this is a technology bubble of sorts.

Given the scenario, regulators like the RBI or SEBI should step in to adopt blockchain technology, and crypto trading should be allowed in a restricted manner. Only mature/sophisticated investors should be allowed to invest as they understand the risk involved.

Inc42: The government has been pouring money into the startup ecosystem through various instruments such as fund of funds. Now it has come up with a seed fund. Are these measures adequate or more has to be done?

Mohandas Pai: The biggest thing the government can do is to reduce the increased surcharge on capital gains from unlisted shares on par with that of listed shares. The government must reduce it from the existing 20% to 10% for listed stocks to improve the capital pool.

Besides, a lot of insurance companies can now invest in category I and category II funds, which is very good. I hope that pension funds and others will start investing in startups. The government has also worked with others to set up large funds, which have done a remarkable job. But we need more funds because the capital pool available for Indian startups is very low and limited.

We don’t want India to become a digital colony. Out of the $70 Bn that came in the last six years, only 10% is Indian money. We want more Indian money to come in. And for that, the capital gains tax has to be reduced. It will move the market much faster.