The Resurgence of Startup IPOs From Its Lull The recent upswing in the broader Indian equity market has played a pivotal role in the revival, say experts

The IPO (initial public offering) market seems to have emerged from its lull as more startups are now going public or filing DRHP. The new-age tech stocks, such as Zomato, Paytm, Policybazaar, Nazara, and Delhivery, have experienced a significant upward movement in their performance. According to experts, while venture capital investments have slowed down, the IPO space is looking good which is encouraging startups to explore further. The current successful listing of Ideaforge has further strengthened the scope of other startups going the IPO way. On July 7th, Mumbai-based drone manufacturer IdeaForge's shares made a successful debut in the secondary market listing at INR 1,305.1 apiece on BSE.

"The secondary markets have shown strong buoyancy, with Indian and global stocks reaching all-time highs, instilling confidence in potential IPO issuers. The primary market tends to follow stock market trends, and the current bullish sentiment is encouraging companies to take advantage of higher valuations," said Ankur Mittal, Partner, Physis Capital.

Why the uptick

The resurgence is being looked at as a promising trend, offering opportunities for startups seeking funding and early backers looking for high returns. But, what has led to this revival?

Firstly, the recent upswing in the broader Indian equity market has played a pivotal role. Tech startups including Zomato, Paytm, Policybazaar, Nazara, and Delhivery, have witnessed a remarkable surge in their stock prices. "They have recovered a significant portion of the value erosion endured over the past 18 months. Moreover, the overwhelming response to ideaForge's IPO, subscribed 106 times, showcases the growing appetite for new-age stocks in the public markets. More startups might consider pursuing public listings, signaling a potentially promising phase for Indian startups," said Sunil Shekhawat, founder and CEO, SanchiConnect.

Some also say that geopolitics and initiatives like the launch of Chandrayaan are also playing a critical role in attracting global investors' attention toward Indian opportunities. Additionally, the pause in the rate hike cycle by the Central Bank acts as a catalyst for economic revival and market growth, further enticing businesses to go public to raise funds and make investments for growth.

Having said that, the IPO market is known for its cyclic nature, and there can be periods of high activity followed by slower periods, which are often referred to as "IPO lulls. "When there is a high demand from investors for new and promising companies, it can spur a wave of IPOs. Successful IPOs can attract more companies to consider going public. The same can be said about the strong and stable economy with positive investor sentiment. Also, technological advancements and disruptive innovations often lead to the emergence of new startups with high growth potential, driving them towards IPOs to access capital for further expansion," Somdutta Singh, founder and CEO, Assiduus Global.

Focus on profitability metrics

The performance of new-age tech stocks like Zomato, Paytm, Policybazaar, Nazara and Delhivery have also seen a significant upward movement. Focus on profitability is the key reason behind the surge, say experts. "Over the past 1-1.5 years, these companies have been on a volatile ride in the public market. Initially, it took time for investors to fully comprehend the unique business models of these new-age firms, leading to excessive optimism. However, later, there was probably an overcorrection, and investors became overly pessimistic about their prospects. Nevertheless, the scenario has now evolved. These companies have made concerted efforts to improve their profitability metrics in recent quarters, showing investors that they are on the right path. Despite still being overall loss-making, the progress made has instilled confidence," said Mittal.

Also, tech stocks, globally, made a significant comeback in the April to June quarter of 2023. The tech sector saw a steep fall and a sharp move up, given the change in sentiment over the last quarter. "This change can be attributed to the build-up of expectations that with lower inflation prints, the rates will start to come off. While tech companies have focused on reducing costs and improving profitability, the tech industry has benefited from the changing macroeconomic environment where the US economy grew, recession predictions have been delayed, and unemployment is low. This has caused investors to reconsider the extremely pessimistic outlook on tech stocks globally," said Sanket Sinha, executive director, head of asset management, Lighthouse Canton.

In general, most of the listed startups have bettered their performance, and the overall positivity in the listed space has also benefitted the stocks that have seen a rough patch considering their performance and cash burn. "The initiatives taken by listed startups to improve their performance and scope of scaling further have improved the sentiments resulting in upward movement in their stock prices," said Anil Joshi, managing partner, Unicorn India Ventures.

Promising signs of economic recovery?

While it is still premature to definitively state if we have overcome the economic downturn, the uptick in IPO activity and the surge in tech stocks indicate improved investor confidence. "Individual company performance doesn't reflect the overall economic situation. The startup market's recovery may still require time, and we can't ascertain if we've reached the bottom of the funding winter yet. The stock market has recovered from a low last year. Private markets tend to follow public market cycles, which might show a 6-9 month lag in response to economic shifts," said Mittal.

Experts say that we are on the cusp and it will be interesting to see where the market goes from here. "The markets are still below average despite what is seen as the Indian economy's strength, 'technology.' This effectively indicates that the potential for upside is substantially greater. The same is true for startups. Startup funding has declined dramatically, likely to the lowest level in the last few quarters. With macro indicators indicating a favorable trend, the likelihood of positive movement is significantly stronger from here," said Shekhawat.

While the successful IPO of ideaForge, subscribed 106 times, validates the appeal of new-age stocks in the public markets, challenges like valuation corrections and corporate governance concerns persist. "Tech companies have learned the things the stock market puts a premium on - profitability, predictability and governance. So, I wouldn't say there is a big shift in the sentiment, but the market is open for good companies and we should start seeing a study pipeline in 2024," said Rajul Garg, founder and managing partner, Leo Capital.

Overall, the situation in the startup space is improving and growth-stage startups have started raising money at decent valuation, however, one still cannot surely say that we are closer to overcoming the economic downturn.