Why Startups Are Postponing IPO Plans
Wrong timing, negative sentiments towards startups, recession, global stock market meltdown and geo-political turmoil are some of the key reasons
After an IPO (initial public offering) sprint last year, we are seeing an IPO drought lately. Many top-tier startups have decided to push their listing plans. The list of such startups include MobiKwik, boAt, Oyo Hotels and Homes, Snapdeal, Droom, Pine Labs, PharmEasy and others. Among these, PharmEasy and MobiKwik have reportedly not set dates for their IPO despite receiving clearance from SEBI.
Valuations of many companies that have gone public in the recent past have taken a beating, which has led to negative sentiments among investors. And, this is one of the key reasons behind many startups postponing their IPO plans. "They would rather invest in traditional companies, which are profit-making. But it is only one of the reasons. The timing is also not right considering recession and global stock market meltdown that is looming around us, apart from rising Inflation, geo-political turmoils, and US markets taking a beating, and foreign investors taking out money from the country," said Mohamad Faraz, founding partner, Upsparks.
Has the Paytm story also made the founders more cautious? "We strongly believe that every business has its unique offering and target market. So, how they perform on the public markets is purely based on how they are delivering on their business metrics consistently, more than the Paytm Fiasco. It is the IPO readiness that matters the most. The Paytm story has not been inspiring and there were negative sentiments since pre-IPO. The valuations were exorbitant and they had negative bottom lines. This added fuel to the fire," he added.
"No single company can be blamed for the current situation, which has emerged from broader macro shifts that are out of the control of any single country, let alone any single company," said Siddarth Pai, founding partner, CFO, ESG Officer, 3one4 Capital.
He also added that the macro situation has shifted due to rising interest rates and inflation, leading many to seek strong cash-generating companies as opposed to growth companies. "The valuation models that extrapolated the valuations of many are sensitive to these rate changes, that has seen many growth stocks globally take a beating in the current market situation," he said.
Is India's story different?
The recent markets have witnessed a significant dip in technology stocks in most countries. Stocks of major global tech companies including Apple, Microsoft, Tesla, Netflix, Twitter and Amazon have also seen sharp falls. But, is there more to the India story?
"Stock markets had a rough year just about everywhere. Some large players in the US have dropped as much as 90 per cent. Many of the recently listed companies in India are also trading below their issue prices. While this is a cause for worry, India is lucky and has weathered the storm mostly because not many such companies are listed, and many private ones raised a lot of money last year. But moving forward, the situation may get difficult for everyone," said Amarjeet Singh, partner and national Lead, emerging giants and startups, KPMG India.
Experts believe that it is too soon to draw any conclusions, but they are hopeful that investments will continue to flow into the country.
Singh feels that as a result of the sentiment of global economy towards China and with money moving out of China; the population on mobile and internet, and expected GDP growth of India will ensure that investments in Indian startup ecosystem continue to flow to the country. "The currency fluctuations coupled with the 'great resignation' that the job markets witnessed globally, will possibly add to the chaos. While we still are battling the global unrest due to the war, the ongoing political happenings in the United Kingdom, are also being closely observed, even though it is too soon to draw any conclusions," he said.
Further, we are also still in very early days of tech dominance on the public markets and many are expecting to see more tech startups take over NIFTY in the next few years. "Also, traditional Indian companies are doing better compared to US companies and have seen revenue increase with better profits. So, we don't think we should worry about the Indian story. Companies with sustainable business models will perform well despite the global fiasco and there are still Indian and global investors looking at the Indian markets to invest as the potential in India is massive," said Faraz.
Another interesting factor is that the tech penetration is higher than the levels enjoyed pre-pandemic. "Indian startups have been overindexed on growth – especially during the low interest rate environment. The business models have shifted to cashflow generation as the rates are rising, keeping in tune with the times," said Pai.