The Missing Startup IPOs: What’s Holding Back Indian Startups?

After the bull run of 2021, the years to come were expected to be golden for startup IPOs. Well, the expectations were further fuelled by the 11 startup IPOs that garnered an overwhelming response during the year. 

However, the tables turned in 2022 and only three startups could gather the courage to walk down the IPO aisle. Further, twenty days into the second quarter of 2023, no startup appears to be nearing an IPO launch.

While GoDigit had to recently refile its DRHP with SEBI due to the latter’s concerns about the company’s employee stock appreciation plans, Flipkart cofounder Sachin Bansal’s Navi is clearly dilly dallying floating its IPO, despite bagging the market regulator’s approval in September last year. 

Taking another chance, Hospitality chain OYO, in a confidential pre-filing with SEBI, recently reduced its IPO size to a range of $400 Mn-$600 Mn from the $1.2 Bn planned earlier. It is yet to file a final DRHP. Meanwhile, traveltech startup ixigo has visibly put its IPO plans on hold.

After a major correction in the stock market last year, which became a reality check for startups like Paytm, Zomato, PB Fintech, and Nykaa, all the major stakeholders of the capital markets, including investors, and IPO aspirants, have become cautious to the core. Adding to this are the uncertain market conditions that have thrown the startup IPO bus off track.

Meanwhile, many industry experts that Inc42 spoke with believe that it’s highly unlikely for a majority of these startups to get listed on Indian bourses this year or see a good post-IPO valuation. 

According to the founder and CEO of Capitalmind, Deepak Shenoy, investors are scared right now for their portfolio companies to go public. He believes that even if these companies go public, there are chances that the market may not show much interest in them. 

Global Alarm Bells Go Unheeded?

According to a recently published EY report, in Q1 2023, 299 IPOs happened globally, raising $21.5 Bn, a year-on-year (YoY) decline of 8% and 61%, respectively. Of this, India contributed 14% to the total IPO numbers, with a total of 42 companies either going public or expected to do so in the quarter.

However, among these companies, all Indian new-age tech startups were seen missing in action, rather shied away from participating. 

Along with the persisting global challenges like interest rate hikes, rising inflation, and geopolitical uncertainties, an upheaval in the global banking industry since the beginning of 2023 has further dampened investor confidence globally.

The collapse of Silicon Valley Bank (SVB) in March this year was the biggest bank failure since the 2008 financial crisis. This has infused panic in the global startup ecosystem as the bank primarily worked with VC-backed tech companies. As of December 31, 2022, SVB held total assets of $209 Bn and deposits to the tune of $175.4 Bn.

However, the global banking turmoil didn’t end with SVB. The back-to-back failure of Silvergate Bank and Signature Bank, along with Europe’s Credit Suisse distress, further complicated the situation for the global markets. 

“Amidst persistent macroeconomic and geopolitical uncertainties, exacerbated by stress in the global banking system, IPO windows are fleeting and funding conditions are getting tougher, with investors now prioritising value over growth,” said Paul Go, EY’s Global IPO Leader, in the report.

Go added that IPO-bound companies need to focus on building sustainable businesses with strong fundamentals to be well-positioned in a volatile environment and meet the challenges and opportunities of going public.

Most of the recent IPOs in India, including those of Avalon Technologies and Sula Vineyard, either made a flat debut or got listed at a discount.

The challenge is even direr for new-age tech startups, believes Kulbhushan Parashar, the founder and managing director of Corporate Capital Venture. 

Amid already-beaten-down market sentiments, the stories of new-age businesses going public with an inflated valuation in the recent past and then bleeding in the capital markets are the lessons that need to be learnt, he said.

“The legacy of loss that investors have seen in the past is the reason enough for them to avoid these (new-age startup) issues. Now, when the market is in a lull, the kind of response which is required to fulfil even the minimum subscription doesn’t seem to be happening. This is a clear reason why startup IPOs are being deferred,” Parashar said.

It is pertinent to note that Mamaearth recently faced severe backlash for reportedly aiming at an IPO with an inflated valuation. The startup’s last private valuation was around $1.3 Bn but shortly after the company’s DRHP filing, there were reports that it was seeking a valuation of $3 Bn.

Echoing a similar sentiment, Ambareesh Baliga, an independent research analyst, said that the new-age stocks have already been hammered badly, so if these IPOs have realistic stock market valuations (not PE valuation), there can be a glimmer of hope. 

“However, given the market situation, most of them may need to postpone their IPO plans,” he said, adding that even the mega IPO of LIC proved that there is no easy money in the IPO market.

However, it must be noted that while the mainboard IPOs of the unicorns and high-valuation companies are being deferred, many smaller IPOs are taking off. 

Last year, Tracxn and DroneAcharya saw successful IPOs, piggybacking on strong growth fundamentals and smaller IPO sizes.

So, Are Small-Ticket Size IPOs The Answer?

The EY report suggests that stock exchanges from emerging markets, including India, are benefiting from the smaller IPO deals currently. In fact, if we look at the BSE SME IPO data, the SME firms collected INR 2,234.9 Cr via 125 issues in FY23, up from 71 issues in FY22.

On December 23, 2022, drone startup DroneAcharya got listed on the BSE SME platform at almost a 90% premium to its issue price. While the startup was looking to raise nearly INR 34 Cr through IPO, it was oversubscribed 262X on the back of strong demand from both high net-worth individuals (HNIs) and retail investors.

Speaking with Inc42 after its listing, the founder of the dronetech startup, Prateek Srivastava, said, unlike many startups that went almost 3-4X in valuation from the last funding round to the next, DroneAcharya wanted to establish that IPOs do not need to be overpriced. The company gave its shares at a pre-IPO pricing. 

“The underlying fundamentals that DroneAcharya has had, the reasonable valuation with which it went public, and the absence of any Offer for Sale (OFS) element, led to such oversubscription of its shares during the IPO. Also, it is sustaining above the issue price,” said Parashar.

He added that if any other company’s issue can establish such benchmarks, they will also be welcomed by investors.

He, however, reiterated that there is no free money in the market right now and retail investors are scared.

Experts are of the opinion that profitability being the key focus of retail investors, the size wouldn’t be a major cause of concern if the underlying company fundamentals are strong. 

However, according to the market, while smaller and SME IPOs are getting traction, the trend, too, might dehydrate soon.

Explaining this, Baliga said that the SME IPO picked up pace over the last two years because it gave great returns to investors. Hence, the early birds made excellent profits since the oversubscription was not high and allocation was good. However, with more investors trying to reap the benefits of this trend, oversubscriptions have started to skyrocket and the quality of issues is on a steady decline. 

“Out of more than 100 SME IPOs in 2022, more than 30 listings turned out to be multi-baggers and the rest gave returns between 20% and 80%, excluding 15-20 IPOs. However, the last few SME IPOs gave poor or negative returns. With the story of IPO listing gains more or less getting over in the SME IPO space, public listings could dry up here too,” he added.

What’s The Next Stop?

While it is still uncertain when the market will revive, some believe that there is a possibility of the situation getting better by the latter half of this year, when ‘good companies with fair valuations’ start floating their public offers once again. 

Parashar said that unlike the big new-age businesses with multiple rounds of external investments, smaller companies have the liberty to get listed at a reasonably lower valuation because they do not tango with external investors.

Hence, the best possible way for the new-age companies is to start reconsidering their valuations, which might also be difficult for them as investors today want hefty returns, regardless of their financial health and dwindling growth outlook, he opined.

As of now, it seems, there are only a few Indian startups that are actually paying heed to what the market desires. This is because when most startups are still waiting for the right time to hit the market, OYO has cut its IPO size. Further, there are chances that the move could be replicated by others too.

It is pertinent to note that several Indian startups, including PhonePe, Snapdeal, MobiKwik, BYJU’S and Flipkart, are aiming to go public in the next few years. Recently, healthtech startup Portea Medical received SEBI’s approval for its INR 1,000 Cr public listing.

As per a recent JM Financial report, several Sequoia-backed unicorns and soonicorns, including CRED, Dailyhunt, and Meesho, are engaged in the groundwork to go public once the market sentiment turns positive.

As the Indian startup ecosystem resorts to the wait-and-watch strategy, it would be interesting to watch how startup IPOs unfold in 2023 and the years to come.