WILL PAYTM'S IPO DEBACLE AFFECT UPCOMING STARTUP IPOs?

MOBIKWIK MAY REPORTEDLY DELAY ITS IPO BY A FEW MONTHS BECAUSE OF A LACK OF DEMAND FROM INVESTORS AND A 30-40 PERCENT DECLINE IN VALUATION

S. Shanthi

India’s Startup Ecosystem was brimming with positive news for the last few months. While some companies grabbed huge funding rounds, many turned unicorns and a few others made a successful IPO debut. And, almost all of them were on a hiring spree. This golden phase, however, hit a bump on November 18, when Paytm's shares fell 27 per cent on debut. On November 22, shares dropped further by over 17.78 per cent at 12 pm. They closed at INR 1,360, 37 per cent below the issue price of INR 2,150. The share price, however, recovered on November 23 and closed at INR 1,489.80 on NSE. This unexpected turn of events has now given rise to the debate of whether it will have an impact on the upcoming IPOs of companies including Life Insurance Corporation of India, MobiKwik, OYO, among others. According to a news report, MobiKwik might delay its IPO by a few months because of a lack of demand from investors along with a 30-40 per cent decline in valuation.

Some market analysts Entrepreneur India spoke to believe that markets are driven by sentiments and this will affect the upcoming IPOs, few others believe it will not make a huge difference, while almost all of them opine that this is a lesson for other startups rushing towards the IPO milestone. “The impact will be negative as investors will be cautious about what kind of valuations these IPOs are coming at. Of course, it will not affect the entire space. Companies that are coming with a strong growth rate, companies with reasonable valuations as compared to global players, companies that are already at profit or have visibility for profit in the near term will not be impacted,” said Karan Taurani, senior vice president, Elara Capital.

He added that there will, however, be concerns for companies that do not have these factors well-covered. “Overall, there will be some kind of caution, but it will not be too negative for everyone,” he said. In the long run, there may not be a big impact as the market and investors will still be bullish on new economy companies. But in the short term, Paytm’s lackluster IPO can make retail investors stay away from subscribing for upcoming IPOs of loss-making startups. “Even though investors in newage companies have realigned themselves and do not expect immediate profitability, they do prefer investing in companies with a foreseeable path to cash flow profitability. New-age companies with large cash burns who are planning to go for an IPO would look to give realistic valuations to the market as well as define a clear path to profitability,” said Ankur Bansal, co-founder and director, BlackSoil. The dull response of Paytm listing came as a shock also because of its last week's mega initial public offer (IPO), the biggest ever in India. The IPO consisted of a fresh issue of INR 8,300 crore and an offer for sale (OFS) by existing shareholders of INR 10,000 crore. It was subscribed 1.89 times last week. “We believe that the stock market and retail investors do not behave the same way as VCs do. Retail investors do not and cannot influence the future valuation of a company the same way as VCs do, and therefore do not reward unrealistically overvalued scrips. Paytm’s poor performance is a reflection of this reality and does not alter the fundamentals of future IPOs or the stock market,” said Anchal Jain, co-founder, Val-More.

Jain, in fact, believes that the impact of this setback will actually be positive. “On the supply side, any highly valued startup will not automatically see an IPO as the holy grail anymore. There will be a more tempered approach to exits for the VCs which means that mere valuation games with no profitability in sight may not end in IPOs. The ERA (Exceptionalness - Rarity - Authenticity) of a business offering is more important than its AURA. This will also be well understood by the investors on the demand side, who will examine every IPO more carefully with fresh lenses,” he said.

The stark difference in the fortunes of Paytm and Nykaa IPOs makes this point even more accurately, she added. Experts agree that this will and should be a learning for all. “While we have seen for the past few years, startups have been raising large quantum of equity from venture capitalists at extremely high and over the top valuations, with the view of capturing market share at the expense of revenue and profit, Paytm’s failure at the IPO should be a learning for all, that a company should be built on a sound and defendable business model. Furthermore, the IPO must be priced reasonably and should leave money on the table for the incoming investors,” said Ram Kewalramani, co-founder and managing director, CredAble. To sum up, experts believe that it is time companies heading the IPO way learned from the Paytm debacle that they may be market leaders, but they should also be profitable or should be able to convince the incoming institutional and retail investors about how and when they will become profitable.

PAY TM : JACK OF ALL TRADES ,