Date: 21 Jun, 2022
Just when the entire startup market was witnessing a bull run and new IPOs were creating history during stock market listings, the sophisticated and seasoned investors who paid attention to the intricate details were sure of the inevitable failure of some of the most awaited IPOs approaching.
To put it mildly, this was a result of expectations built due to previous successful startups getting listed on international exchanges, which was a trend that continued all around the world and followed even in India. When India first witnessed the initial listing of startups, there was a sense of excitement and belief that anybody and everyone would benefit from the listing and that even traditional companies that were listed would perform well during the IPO. This pseudo-belief soon turned into a distant dream as some of the biggest IPOs like Zomato, Paytm and CarTrade were not able to sustain the valuation they desired.
Such IPO flops were not some random events but something that transpired due to a mix of the following reasons:
1) Bullishness on the big names and a pre-assumption that their IPOs will perform great during the listings.
2) The market’s perception of looking at technology companies and thinking that they will change the world overnight and everyone will make money in the easiest way possible.
3) Most of these startups went through with the IPO listing so that they could offer an exit to their existing investors as can be seen from the high ‘Offer for Sale’ allocation.
4) Although these businesses were not necessarily ready to the extent of being profitable but considering that there was an opportunity for an exit and there was acceptance in the market, they moved ahead with the listing.
Market experts, traders, and everyone else that witnessed these stock market events concluded that it wasn’t a mistake of any particular segment involved. It was a basic function of the market where you trade when you find the right opportunity and, in this case, clearly some of the private equity and venture capital funds managed to get some great exits.
What does this imply for companies involved, in the long run? Does it mean that these companies have no future or have the wrong business model? It is definitely not the case with them. Our markets at this time are not mature enough probably to replicate how investors in the US or other developed markets think.
We come across a lot of discussion going around about loss-making businesses getting listed and commanding valuations, and those valuations make people uncomfortable considering there’s a huge net loss these companies deal with. But the very fact remains that these are the businesses that require you to take a long-term perspective which must be considered for 7-10 years, that too after their listing.
It’s clearly evident that all these new-age businesses have come into existence only in the last 7-8 years. So, it’s quite unfair for us as investors to expect such businesses to reward us with handsome profits in such a short tenure. Only senior investors tend to stay in the game with long-term outcomes. Those who believe in the story of tech commanding a larger part of our lives going forward and have a positive outlook towards smart technological evolutions, connectivity, cheap data revolution, high-speed 5G, etc., will reap the most rewards. A huge bracket of India’s population, approximately 60% that lies in the young bracket range are well versed with technology and they will be the reason for our leap towards the future, with tech being the backbone.
Sooner or later, technology-efficient businesses with the right fundamentals in place will definitely be commanding the largest share for the longest time in the future. This is what investors need to keep in mind in terms of the key aspects when they are looking at traditional listed companies that have already achieved a certain level of maturity in their operations and if it promises to be a bet toward long-term sustainable growth. Thus, as investors choose to make investments for the future, the side driving innovations through tech i.e. most of the new age technology startups will always be the promising ones to go with.
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