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Growth Capital – Knock on the Doors of Public or Queuing at the Door of a VC To make SME-IPOs further mouthwatering for companies, the compliance and regulatory requirements are relaxed and most importantly these platforms discount the profitability criterion

By Ojas Agnihotri

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Resounding the recent news, the Indian economy outran its previous quarter's GDP growth rate from 7.4per cent in Q4 '18 to 8.2per cent in Q1 '19 (April-Jun) and yet again stood out as one of the fastest growing economies in the world. In the background of this and in spite of the fact that the Investments in multiple sectors is soring high, the growth stage companies would agree to the contrary.

Entrepreneurs and technology company promoters would strongly contribute to the opinion that Growth Stage Capital is running short in India vis-à-vis the USA, if not in "Quantum', at least in its "Distribution'

In India, 31per cent of funded companies (who have raised angel/seed/friends&family financing) raise follow-on rounds such as series A, B and only 4.5per cent of such funded companies are able to actually scale by raising growth-stage capital (series C and beyond including PE). Contrasting that to the USA, around 50per cent of funded companies (who have raised angel/seed/friends&family financing) raise follow-on rounds such as series A and B and 14per cent of such funded companies are able to actually scale by raising growth-stage capital (series C and beyond including PE)

The above data is presented in terms of "percentage of companies' (in per cent) funded instead of the usual quoted format of "amount of money invested' (in $$) because the latter disproportionately distorts the picture when a company closes a large, $500M or $1Bn round from a marquee global investor

One obvious reason why the per cent of companies who have raised Growth-Capital in India is one third that of USA is that Indian VCs are more averse to risk than their US counterparts resulting in months, even a year, to raise growth capital from the private markets

This inadequacy for growth capital is becoming a slow but a steady realization for a lot of CEOs, and in an attempt to by-pass that, a growing number of mature stage tech-companies are tapping foreign VC Funds but interestingly quite a lot are looking overseas "Capital Markets' for answers. MakeMyTrip, Yatra, Azure Power (to name a few) sought their answer by listing on NASDAQ and a bunch of other ShopClues, Policy-Bazaar and GirnarSoft (CarDekho) are considering going that path

The Drain

This drain of high-growth companies to an overseas market is a growing concern to the Indian government, taking a toll on the Indian economy along with a smack to the government revenue. To arrest the flow of companies listing on the overseas market, the government, in 2012 took a major step to address this issue by launching platforms like "Emerge' by NSE and BSE-SME platform by BSE, which allows growth-stage companies to raise financing from the public, crowd-funding style. Not only are these platforms facilitating different avenues for growth capital but they also bundle with them, benefits like 1)Enhancing company visibility 2)Providing Exit options to investors boosting the early stage private investment markets and encouraging innovation 3) access to a new class of investors; to name a few

To make SME-IPOs further mouthwatering for companies, the compliance and regulatory requirements are relaxed and most importantly these platforms discount the profitability criterion, keeping in mind the startup eco-system in India. Below is a comparison on the crucial pointer of Emerge Platform (by NSE) via-a-vis the NSE MainBoard

This platform offers an alternative for SMEs to sidestep the VCs and raise funds from Capital Markets. It also provides a juncture for informed retail investors to earn better returns by taking the enhanced risk of investing in emerging ventures. From a VC's lenses, the SME platform is "de-centralizing' the "VC-like-returns' amongst individual retail investors. In other words, it is creating an unprecedented opportunity for a retail investor to earn "multiple-x' returns which were otherwise restricted to the world of VCs & PEs

The Data

To further sweeten the proposition, SEBI also extends a provision for SMEs to get listed without an IPO, where the SME can list their specified securities on Institutional Trading Platform ("ITP") of a recognized stock exchange and raise capital through private placement or rights issue.

If we consider the growth of SME Index in the plot above, from 2012 to 2017 over a span of 6 years, it gives us an IRR of a staggering 68per cent, undermining the value proposition funds offer to their LPs

To give a glimpse of the deal flow from this channel, Over the last 5 years BSE SME platform has listed 254 companies and helped raise over US$250M. Though the numbers are minuscule compared to private investments, given the compliance rigor and additional liquidity SME-Platforms offers, makes it a strong contending point to evaluate if these IPO platforms can become a source of deal flow for growth-stage VC funds and can Growth-Companies knock the doors of the public instead of queuing at the doors of a VC

Ojas Agnihotri

Associate, Anthill Ventures

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