[The Outline By Inc42 Plus] Unicorns, Bulls & Bears — The Wild Startup IPO Story

Dear reader,

There’s something ironic about the term unicorn. It’s ironic because the mythical and magical creature is said to be elusive, yet most startups seem to be turning into unicorns rather comfortably if this year is any indication. But 2021 has also proven that these startups need to be more wary of two far more ubiquitous animals — bulls and bears.

This mash-up of unicorns, bears and bulls has defined 2021 in many ways. After all, it was the year of record number of tech startup IPOs and unicorns in India.

Besides the focus on innovation, the growth and scale, IPOs have gripped the imagination of the startup ecosystem, underlined by the massive hype around the public listings of Zomato, Nykaa and Paytm, even as half-a-dozen other startups also made their stock market debut.

But this is just the beginning. Market analysts and investors are eyeing a bigger slice of the tech pie in the next couple of years as the momentum of IPOs is expected to keep rising.

Indeed, over two dozen startups are lining up for IPOs in the next couple of years. But before we look at the imminent IPO rush of 2022, it’s pertinent to look at the state of the startups that have already gone public.

State Of The Public Startups

It all started in March this year with EaseMyTrip’s IPO, followed by gaming company Nazara, but the most-hyped IPO of the first half of 2021 was of Zomato in July, before Paytm stole that thunder in November.

One of the key factors for the IPO streak has been the perceived large investor appetite as well as the higher liquidity in the market, thanks in part to the US Federal Reserve’s liquidity injection or quantitative easing to boost the economy in 2020.

Nazara, EaseMyTrip, Zomato listed at a premium in the first half of the year and those listing gains boosted the confidence of the market. But since then only Nykaa and Policybazaar have listed at a premium. CarTrade listed at 7.29% discount, while Fino saw a discount of 5.5% and Paytm, India’s biggest IPO, saw the biggest discount of 27.25%. RateGain and MapmyIndia are expected to list in the next couple of weeks.

Analysts believe that the Indian investor is smart enough to know about sticking around for the long haul. More and more investors see that tech stocks require a long-term view, but not all may see it that way yet.

In particular, the Paytm listing has brought in some panic among investors, given that the company was expected to be a flagbearer of public tech companies, but has become an example of caution.

While there are some legitimate concerns about the company’s spread-out business model, the high valuation and verticals such as gaming — besides the lack of profitability — analysts claim the long-term picture could be rosier.

Listed companies that achieved growth amid the pandemic should be confident of continuing on that track. They can continue to tap the stock markets for expansion capital, if they can overcome their biggest hurdle: profitability.

In the aftermath of the rather unimpressive listing, Paytm founder Vijay Shekhar Sharma claimed that the market needs time to understand the fintech giant’s business and customer acquisition model, unlike say food delivery or beauty ecommerce.

Profitability Eludes Listed Startups

The real problem is that such an explanation would not be required in the first place if the company had achieved profitability, which would have settled the debate.

The financial performance of newly-listed tech companies has not improved significantly.

Nykaa reported a 96% fall in its September quarter net profits as marketing and advertising expenses jumped nearly fourfold. Zomato nearly doubled its net loss for the September quarter to INR 434.9 Cr, though revenue from operations more than doubled.

In the case of Paytm, the company reported 8% wider losses with arrears of INR 473.5 Cr during the July-September quarter, even as its revenue grew by 63.6%.

Paytm is currently trading at INR 1,564, down INR 100 from the week’s opening, while Zomato has also fallen from INR 144.50 to INR 140.70. Nykaa too is down this week, falling from the heady heights of INR 2,287.85 to a more sobering INR 2113.70.

The financials highlight how elusive profitability is for Indian startups, particularly since they are also scaling up.

While a traditional business would focus on profit before anything else, startups are scale-first. This is reflected in the statements made by founders and promoters — essentially all of them claimed that profit is not a priority for them, but proving the scale is.

No one knows when profitability will come; there are too many factors at play, and the competition in sectors such as fintech and ecommerce is getting more intense with the emergence of new models. Investors await the full picture.

Investors need to take a slightly more futuristic approach in valuing startups. The traditional method of valuation based on profits and cash flow has to be set aside.

Take for instance, the MapmyIndia IPO which has been oversubscribed 6.31 times, where the tech-heavy business model means that investors have to keep an eye on the changing landscape in the mapping and location tech space. The category is already new for most retail investors, with very little precedent and hence, it will require a more hands-on approach, particularly if the investor is set on not just following the institutional herd.

The 2022 Outlook For Indian Startup IPOs

The overall conversation about the Indian economy’s growth is turning positive. And while there is still a long way to go for a turnaround, startups and tech companies will undoubtedly lead the reversal. The successful listings of Zomato, Nykaa, Policybazaar are the guiding stars for the 20+ startups that are about to IPO in 2022 and 2023.

The list includes behemoths such as Delhivery, BYJU’S, PharmEasy, Ola, OYO, Pine Labs, Swiggy, Flipkart and others — in other words, the cream of the Indian startup ecosystem. The tech industry is buzzing in anticipation.

Startups are disrupting existing traditional models. There’s more acceptability for tech solutions among investors, and the awareness for tech products and platforms is also increasing. The emergence of 40 new unicorns in 2021 has coincided with a massive transition towards apps, and digital services and products.

This momentum means that analysts are rather confident that startups will answer the call for profitability soon after listing, just like US tech giants Amazon, Facebook and Google did. Indian investors need to be aware of that journey and need to remain patient.

If anything, the Indian market is maturing at a similar rate to the US in the late 90s and early 2000s.

Hope Floats

Analysts pointed out that in a bull market, the potential of listing pops or gains increases, but investors cannot look at it as a wealth-creation opportunity. As a result of massive oversubscription, the allotment to a single retail investor remains on the lower side, which does not help in wealth creation for IPO investors.

Of course, some are also worried about the impact of the US Federal Reserve’s gradual tapering of its quantitative easing which had stimulated the stock markets after the pandemic. No one is sure yet how this will play out, but analysts believe that the impact of foreign flows into Indian equity markets has been reducing with time.

Many told me that today, the Indian market is primarily shaped and forged by domestic institutional and retail investors. Retail demat account additions are increasing at a record pace — from 3.8 Mn new accounts in FY19 to 14.1 Mn in FY21 and 7.1 Mn in Q1 FY22. It shows domestic participation growing.

But of course, the pandemic is still raging on with new variants scaring some markets. And geopolitically speaking, there are risks with regards to the Russia-Ukraine situation as well as the US-China, India-China and China-Taiwan tensions. If any of these escalate into more serious situations, the market might get spooked.

Within this potential dark cloud, analysts see a silver lining.

India’s higher population of young investors and the underpenetrated retail investments market are both positive factors that could sustain the IPO mania.

The maturity of the most popular Indian tech platforms and their steps towards positive unit economics in the past couple of fiscals also bodes well. Many startups have become irreplaceable among certain demographics — ecommerce, hyperlocal delivery, digital payments, media and entertainment being prime examples.

The sheer market might of the companies aiming for public listings is too big to ignore. So yes, 2022 is going to be a big royal rumble of startups going for IPOs, and those watching the market have already grabbed the popcorn.

Till next week,
Nikhil Subramaniam

Images: Gayatri Sharma