Indian Startups IPO : Why Retail Investors should think twice

Indian Startups are having a dream run. PhysicsWallah becomes the 101st unicorn of India. It seems that India is on the right path of development. India had just one startup in the unicorn list almost a decade ago.

There are 101 startups whose value exceeds $1 billion in India today. Indian Startup Funding hits $11.8 billion in Q1 2022, sets record for M&As And B2B Deals. In addition, Indian Startups raised $44 billion from investors in 2021. There are 65K+ startups in India which are recognised by the government and everything seems good.

In all this we forget that businesses are made for profits and they are built on investors’ money. The investors put their money into the startups to grow the money. This is where the problem begins and we are here to address it.

Indian Startups and Venture Capitalists

Indian Startups are valuable today because of the venture capitalists and investors. These VCs hold money pooled from investment companies, large corporations, and pension funds. Moreover Venture Capitalist is an individual or a group or a company that invests this pooled money into these startups.

Venture Capitalists active in India
Some VCs active in India

VCs buy equity (shares of company) from the startup stakeholders. The more you sell your equity and raise money, the more these VCs get the control of the startup. So these startups are liable to payback the VCs. In turn the VCs are liable to payback to the portfolio they are managing. The point of VCs investing money is to gain the most from the growth of the company and sell those shares back.

Issue with growth stage startups

The issue right now with Indian startups is that all of them are in the growth stage. They are into cash burning and trying to capture the market as much as possible. Yes, it is indeed true that in a large free market economy, companies have competitors. To have an edge over competitors, companies need to burn cash and gain customers. But who will suffer afterwards?

Indian Startups chose growth and funding over sustainability and profitability. Even though India has 101 unicorns, only 18 of them are profitable. When we say India has 100+ unicorns, it does not mean they are all profitable, they are just ‘valuable’. There are different ways to calculate the value of the company. Value calculation totally depends on what stage the company is in.

Fintracker report on Startups in India
FinTracker Report on Profitable Startups

The problem starts when these companies list themselves on the stock market and go for Initial Public Offering. In this stage, the Venture Capitalists sell most of their stake in the company. Such companies are neither profitable nor sustainable in the long run. Hence it is the retailers that suffer in the end. They buy these shares and later suffer, let us see how!

Should Retail Investors buy shares of Indian Startups?

When the economy is growing and inflation is high, money grows no matter what. Same happened with India. Venture Capitalists invested into the startups and their money grew. This leads to more mediocre venture capital. In turn, this mediocre venture capital leads to more mediocre startups.

Mediocre startups will never lead to profitability. In short run they might show growth but in the long run they are all dead and buried. Why they are dead and buried? Usually startups go public when there is little growth left with them and certainly have no money to run in the coming years.

So where is all this dumped? Yes, to retail investors. Retail investors like you and me buy these worthless shares and see our money dying.

Indian Startups’ performance on the Stock Market

There have been several claims from notable economists and financial advisors that Indian startups are over-valued when listed for IPO. Furthermore, the stock price is listed much higher than the current situation. This is done to serve the VCs and investors and give them a grand exit from the company.

In 2021, Zomato, PayTm, Nykaa and 8 other startups were listed on stock market. These 11 startups raised over $7.36 billion through their IPOs.

Company Name IPO Offering Share Price as of June, 2022
Zomato 11668
PayTm 2150624
EaseMyTrip 206 393
Nazara 11011169
CarTrade 1618706
FreshWorks 28061162
PolicyBazaar 980588
RateGain 425288
MapMyIndia 10331358
Fino 577261
Nykaa 1125 1441
Indian Startups gone public in 2021

For retail investors

It is important for the retail investors to think twice before putting their hard earned money in any stock listed on BSE/NSE. Rather than going for the name, one must look at the background and check the ground reality.

Ask these questions to yourself and try finding the answers –

1. Why do you want to raise money when you are in losses? 
2. Which startups are profitable? How they gained profitability?
3. FIND any one city except the metropolitans where profits exceed cash burns?
4. Who will lose money when loss making companies are listed on Stock Exchange?
5. Who will get fired and be affected the most?

It is said that 99% of the startups are doomed to fail. The uncertainty is as high as ever. The experience is rewarding yet the journey is daunting. The stakes are higher than ever and it is something not everyone can do. The only issue with startups is that a lot of people would come in the way and shake our existence, bombarding with questions. The idea is to keep on going.

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