Growth before IPOs, not after

The Chinese Ant Group-backed Paytm’s debut debacle in the capital markets recently, has kicked up a storm with discussions around unicorns - ranging from valuations, regulations and even mispricing. Paytm, a brand that triggered huge expectations among retail investors, wiped out $7 billion off its listing valuation of $18.74 billion, making it one of the worst-ever market debuts for a large Indian company, spooking investors and IPO-bound brands alike. However, there have also been some stellar success stories where technology firms with fundamentally-sound business models have raked in the moolah via IPOs or private equities. Freshworks, rooted in Tamil Nadu, made a stellar debut at the Nasdaq when the Software as a Service (SaaS) major, in its attempt to raise $1.02 billion, set its IPO at $36 a share. Touted as India’s first SaaS company to be listed on Nasdaq, the Freshworks IPO created 500 millionaires in the country, 70 of them under 30. Another company to have a blockbuster IPO debut was Nykaa. The former investment banker-turned entrepreneur Falguni Nayar’s venture took the market by surprise when the cosmetics-to-fashion platform soared 96%, fetching the country’s first women-led unicorn, a valuation of nearly $14 billion. Nykaa’s valuation exceeded even food delivery start-up Zomato’s mind-boggling $13.28 billion debut in July. Around 52 companies raised Rs 1.08 lakh crore from the market this year as compared to Rs 26,600 crore raised by 15 companies in the last calendar year. That 40 Indian start-ups earned the unicorn moniker this year is clearly a reflection of where the appetite is and how efficiently managed enterprises can think of a dream run. Slice, Upstox, NoBroker, Licious, Vedantu, Grofers, upGrad, BharatPe, Groww, PharmEasy are some such ‘hot’ entities that have lent veracity to the Centre’s hard-sell on the ‘Start-up India’ story. Often, and this is true, especially in the case of unicorns, we see several companies with cash-reliant business models, but no clear path to profitability. They are also weighed down by the burden of questionable corporate governance and regulatory risks to the business, to which many owners or founders turn a blind eye. And this is often what causes them to trip at the stock market. With rising lending rates, investors are now much more cautious and selective in the IPOs they apply for. Due diligence, which involves fundamental research into the nature of a business enterprise, vis-a-vis its potential for short term and long term earnings, as well as its continued sustainability in a relentlessly volatile and fickle economic milieu, is the need of the hour. Rather than gazing into a crystal ball with the hopes of forecasting future earnings, it would be prudent to rely on data at hand and the performance over time. Investors must not get swayed by the valuation game. Instead, one must understand the ground reality of the prevailing economic situation before taking decisions with an eye on short-term gains. One must not forget that as far as investors in the country are concerned, the going mantra might as well be, once bitten, twice shy. And before the market loses its appetite for investment in unicorns, it would be wise for upcoming businesses to begin building a rock solid portfolio, working towards achieving an unblemished track record when it comes to deliverables. Before rushing to raise funds in the open market, it’s essential that they present a compelling structural growth story, based on hard numbers and not just smoke and mirrors.