Paytm’s Nervous November

Is the Paytm story unravelling? Many are asking this question after another tough week for the company, which was once considered the flagship Indian fintech startup.

But life as a public company has come with all the pressures that were expected even in the lead-up to the $2.4 Bn IPO.

Founder and CEO Vijay Shekhar Sharma faced one vote of confidence in August and continues to lead the ship, but these past few weeks have brought fresh concerns because of new competition and more regulatory trouble. Is Paytm in danger of losing its fintech flag-bearer status?

Before we look at that, here’s a peek at the top stories this week:

• The FTX Warning Bell: Will the FTX collapse trigger a faster wave of regulations in India to protect crypto investors and web3 innovation?
• Amazon Layoffs: After coming under pressure to explain claims that employees were asked to resign, Amazon India told labour ministry it has not fired a single employee in India yet
• Swiggy $1 Bn+ GMV:  Investor Prosus has claimed that Swiggy food delivery GMV crossed $1.3 Bn between April and September 2022

Paytm’s Plunge

Paytm now holds the unenviable record of having the worst first-year track record in the past decade for large IPOs. That’s among companies that raised close to the same amount as Paytm did — and the pain seems to be worsening.

The fact that this is coming right on the first anniversary is not a coincidence as the stock was already under an immense sell-off pressure since December. But now investors including SoftBank have trimmed their positions as the lock-in for pre-IPO investors has expired.

The 30% slide in November means the Paytm stock has declined 79% from the IPO price of INR 2,150.

RBI Bars Pinch Paytm

The stock market performance is also a reflection of the serious headwinds for Paytm in the market  — major competition is going after the same class of merchants, its super app approach is not paying off in terms of maximising revenue from users, and regulatory hurdles have also slowed growth in other areas besides lending.

In terms of regulatory friction, the RBI has barred Paytm Payments Bank from onboarding new customers due to IT outsourcing and operational risk management issues. The central bank shared its final observations with Paytm earlier this month, six months after barring the company, but Paytm cannot onboard new customers even now till the RBI gives it a final go-ahead.

In another blow, the RBI has barred Paytm Payments Services from onboarding online merchants due to a licensing issue and the lack of mandatory approval related to FDI rules in financial services.

Even though it has been in the market for over 12 years, Paytm continues to grapple with these challenges, which have become a major hurdle ever since it went public.

The Reliance Jio Factor

The company is banking on loans as a growth factor, but so is pretty much every other fintech company. It also has eyes on newer areas such as insurance, where it is yet to make a solid dent.  But by far, the biggest new threat is the arrival of Mukesh Ambani-led Jio Financial Services.

Analysts pointed out that Paytm could face great risks from the entry of Jio Financial Services, which was announced in October. Jio’s parent company RIL, which clocked $100 Bn in consolidated revenue, is not just in the position to take on Paytm, but some of the largest banks in the country.

“Jio Financial Services will have a large balance sheet, not be asset-light and eventually manufacture most product offerings, giving it a significant competitive advantage,” brokerage Macquarie noted this week.

Jio Financial Services will offer consumer and business lending, insurance, payments, digital broking and asset management services and is looking to become a super fintech app, which is something that Paytm has long touted as its strength.

The Heat Is On Vijay Shekhar Sharma 

In the most recent quarter, Paytm’s losses widened by 21% to INR 571 Cr in comparison to last September, when it was still not publicly listed. After the IPO, CEO Vijay Shekhar Sharma had claimed that the company would only reach EBITDA breakeven by September 2023.

According to related-party disclosures made by Paytm, the fintech major spent INR 564 Cr (50X higher than FY21) for ESOP expenses towards directors, key managerial personnel (KMPs) and their relatives. This is in addition to INR 5.22 Cr for salaries, bonuses and incentives of directors, KMPs and their relatives.

After the Q2 results, Sharma wrote to shareholders saying the company is “on the right path to profitability and free cash flows” and is optimistic about the lending opportunity due to the low penetration.

But competition from players such as Bajaj Finance, Pine Labs, PhonePe, Lendingkart, BharatPe and merchant-focussed banks and neobanks is not about to slow down. They are all more or less after the same class of merchants that can sustain high volumes, and acquisition costs remain high in this segment.

Plus on the payments and commerce side, PhonePe, WhatsApp Payments and Google Pay remain big competition for Paytm with a significant user base. PhonePe is reportedly on the verge of making a major splash with a $500 Mn fundraise and is said to be looking to strengthen its lending business with a potential acquisition of ZestMoney.

Earlier Kush Ghodasara, an independent market expert, had told Inc42 that Paytm’s spend on marketing ancillary services such as commerce, ticketing and more is likely to affect Paytm in the long term and that these knock-on effects will be more prominent after the lock-in expiry.

The tough times might well pass soon for Paytm if it can overcome regulatory friction and sustain its loan growth, but not before tougher days in the short to medium term.

Micro VCs In Focus

While the funding winter of 2022 is very real, seed and early-stage investing has been a safe haven, which is why institutional micro venture capital (micro VCs) are becoming more prominent.

So we dove into the vast and expanding micro VC ecosystem in India, which is giving startup founders avenues for fundraising besides angel investors. Early-stage startups are discovering that micro VCs offer more than just capital when it comes to niche business models and emerging technology.

And with CapitalX by Inc42 in early 2023, we are helping founders, angel investors and investment professionals launch and manage their own micro VC fund. The speakers and mentors that have come on board include Aarin Capital Partners chairman TV Mohandas Pai, Fireside Ventures partner Dipanjan Basu, InnoVen Capital’s Tarana Lalwani, 100X.VC’s Sanjay Mehta among others.

Sunday Roundup: Startup Funding, Analysis, Top News & More

• Indian startups raised $245 Mn this past week with Bira91’s $70 Mn and HealthKart’s $66.5 Mn accounting for more than half of the tally
• Despite not being as big as Black Friday in the US, the shopping festival is still drawing significant interest and spending from Indian ecommerce brands
• Experts and privacy groups call for clarity on the functioning of the Data Protection Board which will be set up under the proposed at Data Protection Bill
• Go Digit General Insurance has bagged IRDAI approval for its INR 1,250 Cr+ IPO which had been kept in abeyance by SEBI pending the insurance regulator nod
• Indian crypto exchange CoinDCX has published a proof-of-reserves report after questions raised in the aftermath of the FTX crash. Here are the details

And that’s all for this Sunday.

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