After destroying investor wealth, can startups attract enough backers for upcoming IPOs?

The Indian startup space could witness an IPO boom of sorts over the next year and half, as almost two dozen new-age tech ventures are preparing to float share sales on stock exchanges. This is twice the number of startups that made their public market debuts over the last couple of years. But will the new IPOs attract enough investors?

Some of the startups that have already received approvals from the market regulator, the Securities and Exchange Board of India, include Ixigo, Mobikwik and Tracxn while some others that have filed their draft papers include Oyo, Droom, Pharmeasy, Snapdeal and Capillary.

In fact, each of these firms is seeking a significantly higher valuation than they got in their last private funding round. Oyo, which was valued at $9.6 billion in its last private funding round, is looking to get valued at $12 billion on being listed, according to media reports.

Pharmeasy, which was valued at $5.6 billion in its last private funding round, is now said to be seeking a valuation of $7 billion. Others that are reportedly seeking to get valued at $1 billion or higher include Droom, Mobikwik, Ecom Express and Snapdeal.

And then there are those that have not yet filed their papers, but are either talking to bankers or are in the early stages of their planned IPOs. These include some of the big fish of India’s startup world—Ola, Flipkart, Byju’s, PhonePe, Udaan, CarDekho, Cars 24, The Good Glam Company and Pepperfry, to name a few.

So, by all accounts, this is a festive bonanza for a potential investor, who may be looking for a multibagger. Or is it?

Well, perhaps not.

Value destruction

A look at how startup IPOs have fared over the past couple of years shows that more often than not, such listings have been value-destructive for the investor.

Consider this. If you were an IPO investor in Paytm, you would be sitting on a 61% loss if you had held on to your shares till now. Similarly, if you had backed CarTrade on listing, you would have lost 60% of your investment.

Other startups that have burnt a hole into the pockets of their investors include online gaming company Nazara Technologies, insurance aggregator PolicyBazaar, and food delivery app Zomato.

To be fair, stock markets have been volatile for the past few months due to high inflation, rising interest rates, concerns of a recession in the US and Russia’s invasion of Ukraine. Still, these startups have fallen far more than the broader market. A key reason why these companies have slumped is that most of them are making heavy losses and public market investors aren’t convinced about their path to profitability.

Only a handful of tech IPOs have actually delivered positive returns. These include MapMyIndia, Delhivery, EaseMyTrip and Nykaa.

To be sure, MapMyIndia and even EaseMyTrip don’t really belong to the startup club. This is because MapMyIndia’s origins go back more than two decades while EaseMyTrip was largely bootstrapped and grew without venture funding, unlike most other tech startups in India.

So, as an investor, should the next round of IPOs in the Indian startup space really excite you?

Frankly, there can be no easy answers to this question. And the reasons go beyond just these startups themselves.

The headwinds

Since the beginning of 2022, the markets have been volatile thanks to Russia’s invasion of Ukraine, which sent the prices of crude and other commodities across the world soaring. This has, in turn, led to foreign institutional investors fleeing India, and weakened the Indian rupee to record low levels of nearly 80 per US dollar.

This, in turn, has caused an inflationary impact, which the Reserve Bank of India has been trying to tame with interest rate hikes, with more expected in the months to come.

This has made lending expensive and venture capital investors cautious. Not only can companies no longer afford to borrow money as cheaply as they were doing only a few months back, they are also finding it hard to raise new VC money at a premium.

In a nutshell, it is tough surviving in this new world if you are a startup, especially in an emerging market like India.

IPO fatigue?

In fact, a recent survey seems to point to IPO fatigue among startup founders. According to a recent survey conducted by startup media publication Inc42, 60% of startup founders are against listing in India.

The TES 2022 Investor Survey noted that the main reason for pessimism toward local listing comes from the perceived lack of understanding of the startup business model in India.

“New-age tech startups have faced public backlash because of their valuations, which has resulted in the startup ecosystem getting wary of listing in the country,” the survey said.

And yet, startup unicorns—companies with a valuation in excess of $1 billion—have reportedly been meeting mutual fund houses and other domestic institutional investors.

In fact, founders at Swiggy, Meesho, Unacademy, Lenskart and Acko, among others have reportedly met more than a dozen domestic institutional investors including the likes of HDFC Mutual Fund, Axis Mutual Fund, Mirae Asset MF and ICICI Prudential MF with $250 billion under management

These meetings have reportedly been proctored by Japanese tech investment giant SoftBank, which counts all of these unicorns in its portfolio, along with US-based investment bank JP Morgan.

And why are they meeting each other?

Apparently to help the domestic investment community understand these tech businesses.

Put simply, the likes of SoftBank and JP Morgan want big Indian institutional investors to buy into the IPOs of their portfolio companies, so that the listings don’t bomb at the bourses and investors are not left with a big hole in their pockets.

But as a report in The Economic Times notes, DIIs have had a mixed outlook towards these tech listings. For instance, during Zomato’s listing in July 2021, almost 19 domestic institutions participated in its anchor book through 74 schemes. These included big names such as Kotak MF, ICICI Prudential, HDFC and Aditya Birla Sun Life Insurance, among others.

In the case of Nykaa, a third of the total allocation to anchor investors was allocated to 21 domestic mutual funds through 93 schemes.

Yet, DIIs remain cautious. During the listing for Paytm parent company One97 Communications in November, only four local asset management companies participated in the anchor book. Their caution has been proven correct, as Paytm now trades at a third of its IPO price. Retail investors perhaps need to be doubly cautious.