Waiting for Big Bang IPO

Last month saw San Francisco based ride-hailing rivals Uber and Lyft kicking off the race to launch their initial public offerings (IPO). In the US, over 38 other Unicorns like Spotify, Zscaler, Dropbox went public last year and that trend is likely to continue, with market disruptors like Airbnb and analytics firm Palantir Technologies expected to file their IPOs anytime soon.

But will this trend transcend into India, which today boasts of 20 unicorns, eight of which attained the $1-billion valuation in 2018?

Experts say IPOs by disruptive start-ups-turned-Unicorns are necessary for the ecosystem as they give a perpetual boost to the sector and reflect upon its maturity.

Rabindra Shrestha, managing partner at Singapore-based private equity firmPrestellar Ventures, says an IPO clearly demonstrates the maturing of a start-up and provides a viable option for running the company independently. “Industry tends to look at public companies as mature. It provides a sense of accountability because public companies have to report on a quarterly basis and are subject to regulatory processes.'' If Indian Unicorns go public, it could give them the opportunity to showcase their acceptance of corporate governance, “which the market appreciates,” says Shrestha.

According to Mr Arpit Agarwal, Principal, Blume Ventures &  VC Sector Council Member, Indian Private Equity and Venture Capital Association, if being in the “big league” was one of the major reasons for Indian Unicorns to go public, they no longer need it since almost every aspect of their business is discussed widely today. “The biggest reason why Ola, OYO or Paytm should consider going public is to give an exit to their investors. Once they go public, there is an automatic recognition of them being “stable” and “mature”.

Agarwal further says that with an exit, much of the wealth that investors generate can be ploughed back into the next set of big ideas and “this will set a huge virtuous cycle into motion, like the one we experienced in the US with the Facebook IPO in 2012, and in China with the Alibaba IPO in 2014.”

Secondly, IPOs allow high-profile unicorns to maximise their fund-raising efforts.

According to Rajesh Sawhney, founder of GSF Accelerator and founder and CEO of InnerChef, another objective behind an IPO is to raise funds for growth and also offer benefits like liquidity of stock options for the employees. Facebook had raised $16 billion through its IPO, while Alibaba had raised over $21.8 billion. If Uber goes public this year, its valuation is expected to jump from around $72 billion at present to $120 billion, according to Wall Street bankers.

Sawhney says that to significantly boost the start-up ecosystem in India, we need “at least 50 ventures going the IPO route in the near future. This will enhance investor confidence in the technology-driven start-up sector and fuel further investments.”

But the ground reality is markedly different. A report by CB Insights states that in 2017, from the 100-odd Indian start-ups that gave the exit route, only 10 did so through an IPO; the rest of the exits were through a mergers and acquisitions (M&A). This marked a slight improvement from 2016, when only four Indian start-ups went public, from a gamut of 180 that chose exit options.

Matrimony.com, Yatra.com, Koovs.com and Justdial are a few notable start-ups to have gone public over the last few years. Experts opine the ecosystem needs a big-ticket IPO, one spearheaded by a high-profile Unicorn to infuse some much-needed momentum. Speculation is rife that Walmart is likely to support Flipkart's desire of going public in the near future at a mammoth valuation.

But given the current market fluctuations and with elections around the corner, experts say entrepreneurs would be sceptical about going public as they may think IPOs right now could fetch a lower price. 

According to Shrestha, there will be a reduction in capital flow if the economy turns, but fundamentally healthy start-ups will be selling out in IPOs whether the stock market is up or down. “Companies may like to be sure about revenue, profitability and operating cash flow momentum for several quarters for the productive planning of IPOs.”

Start-ups, on the other hand, feel that besides the outside environment, choosing when to go public is also determined by their internal groundwork and structures. “It is important to choose to go public when all the building blocks are present. If ventures do go public otherwise, the vagaries of quarterly growth goals and annual guidance metrics can drive them to make incorrect choices or decisions. The decision is based on the strength of processes, maturity of the business model and having the right team in place. While IPO is a milestone every entrepreneur dreams of, it is not a goal in itself. One cannot build a company with IPO as a goal,” says Chaitanya Ramalingegowda, co-founder, Wakefit.co.

A VERY, VERY SMALL CHUNK

• 10 – Out of the 100-odd Indian start-ups that gave exit to investors in 2017 went for an IPO, as per a report by CB Insights
   
• 4 – Out of 180 start-ups that gave exits in 2016 opted for IPO