Ram Suresh
When food delivery firm Zomato kicks off its initial public offering (IPO) this week it would add another feather in the cap of Indian capital markets. The share sale is expected to be a trend-setter for start-ups as well as the stock market, reminiscent of Infosys’s listing nearly 30 years ago which paved the way for a spate of software services companies and drew droves of new investors to the equity cult.
Much water has flowed over the past many years. Businesses and perceptions have undergone revolutionary changes. Giant strides in communications technologies such as the Internet have brought markets closer. Perhaps the biggest impact has been in the spawning of a new breed of entrepreneurs – who had imaginative ideas but little cash.
Sensing an opportunity, venture capital and private equity funds promptly stepped in to back the entrepreneurial talent. Sure enough, many investments had to be written off, but some hit the jackpot. The success stories have created visions of glory at some point in the future. The phenomenon underscores overwhelming confidence in the dream.
There is a good reason for new-age start-ups to conjure visions of celebrity status. Take Facebook for instance. The social networking site made Mark Zuckerberg a household name worldwide after he led a group of Harvard University students to launch the company in 2004. Amazon, the world’s largest online retailer, was founded in a garage by Jeff Bezos in 1994.
Both Facebook and Amazon commanded high valuations, even before they started making profits, reflecting broader investor confidence in the outlook for the companies. Zuckerberg and Bezos have become billionaires thanks to their holdings in their respective companies. While Facebook took five years to turn in a profit, Amazon trudged seven years to get in the black.
Like many things in India, the authorities here have been painstakingly slow to grasp newer developments and usher in enabling provisions to keep pace with the world. While start-ups in the West could easily list on the bourses there and grew by leaps and bounds, rigid regulations in India such as profits for a minimum number of years as a must to access public capital effectively shut them out from the stock market here.
Despite the handicap, India is home to a large number of start-ups, all funded by private equity and venture capital. There were about 100 “unicorns” in India with a combined market value of $240 billion, spanning sectors from e-commerce and fintech to education, logistics and food delivery, global investment bank Credit Suisse Group AG said in a March report. Unicorn refers to a start-up that has a market value of $1 billion or more.
Although it will take years for start-ups to start making profits, there is no dearth of fund flow into these companies and some Indian start-ups are listed overseas. According to one estimate, Indian start-ups raised nearly $11 billion between January and June this year, mostly from private equity.
The much-awaited share issue by Zomata will be the first major offering by a start-up in India after the authorities eased the rules for IPOs. The public sale, which opens on July 14, aims to raise as much as Rs.9,375 crore, or about $1.3 billion at the current exchange rate. The company’s losses dropped to Rs.816 crore in the year ended March 31, 2021, from Rs.2,386 crore in the previous year and compared with Rs.1,010 crore in 2018-19. “Our losses will continue, given significant investments expected towards growing our business,” Zomato said in its IPO filing document.
Although food delivery is a rapidly growing business, it is impossible to predict when companies will begin to rake in profits or whether Zomato would survive in the longer term.
Still, a successful share sale would open the flood gates to many other start-ups waiting in the wings. Fintech firm Paytm, e-retailer Nykaa, online insurance platform Policybazaar and logistics firm Delhivery are some of the companies in the queue. Education start-up Byju’s may also be tempted to speed up plans for its IPO.
Giving these companies the opportunity to list on the stock market will provide early investors like private equity and venture capitalists an easier exit route, and bring in new retail and institutional investors. The listings can also pave the way for sovereign and pension funds to buy stakes in such companies, further broadening the investor base.
In 1993, when Infosys launched its IPO, few people understood the software services business. It was a new, untested idea. Many investors who took the risk and bought shares in the IPO were amply rewarded, and the company catapulted the country onto the world stage.
There is a good chance the start-up IPOs could make a difference. With luck, home-grown companies may become leaders in their sectors, and live up to the Atmanirbhar Bharat aspirations.
“The coming mega IPOs of home-grown start-ups testify to the vigour of the Indian start-up ecosystem and the maturing of the capital markets,” the Economic Times wrote in a recent editorial.
“Successful listing of these companies will be a huge morale booster for Indian start-ups.”
