This post has been authored by Shwetha Vincent and Anjan Kumar, Research Analyst Interns at Arthashastra Intelligence

The recent IPOs of Nykaa and Paytm offer two opposing views on start-ups. Paytm’s IPO, India’s biggest ever, was a massive disappointment. Many market participants deem that it is a warning to the market not to place too much faith in start-ups. However, Nykaa’s IPO exceeded expectations with a strong listing and receiving high investor traction. India’s biggest start-ups have been going to the stock market with ludicrously high valuations, while their companies have been making continual losses. Is there potential for them to grow? Or is a melt down imminent? 

A unicorn is a private company with a vacation of over $1 billion. The number of unicorns in India has been steadily increasing. From 2015, the number of unicorns started to increase, with 28 unicorns produced in 2019-2021. The start-up environment in India is booming, and investors have faith that these companies will do well. Fintech has the highest number of unicorns in 2021. It is followed by e-commerce, SaaS, marketplace, edtech, NBFC and B2B. There are 7 stages in the start-up lifecycle, starting with the seed stage. The seed stage is the preliminary round of funding. Next are venture, series a, series b, and series c funding. These rounds are used to fulfill various need of the start up- from marketing to staffing. The final stage is IPO, where the company raises money from the public by issuing shares. 

High value IPOs have become the norm when it comes to start-ups. For instance, BYJU, an edtech company, plans on an IPO of $40-50 billion valuation, while it was valued at $16.5 at a recent fundraiser. Start-ups are generating massive valuations, compared to traditional businesses. This can be attributed to investors who hope to get high returns and also the increase in investor interest. But the important question is whether these businesses are sustainable eventually. The needs of the investor have drastically changed, with immediate profitability forsaken for growth and a long road to profits. These start-ups have a good customer base, reliable supply chain and an immense potential to grow, putting them on the fast track to revenue growth. But in the current economy, there is a chance of overvaluation. As people look to the future in hope in the current K-shaped economy, there is a chance that this hope is misplaced.

Paytm’s flask offers a chance to reflect on the current trend of over valuation. After raising Rs 18300 crore, it listed on the stock exchange at a 27% discount. Until this point, the trend of IPOs has been fuelled largely by investor confidence. Paytm’s situation could shake that confidence and impact funding eventually. According to an SBI report, there was an increase of 70% in UPI transactions in India in last 4 years. Paytm, once a top market player (68% in 2017) had lost the market share to major players like Phone pay (46.04%), Google Pay (34.63 %) etc. in 2020-2021. It has mere 11.63% now. It isn\’t innovating the product or itself. The strengths that it had once now may have become its weaknesses. However, it remains that a single listing cannot affect the entire market. When Facebook got listed 10 years ago, it was around 30 dollars a share. After a week, it was 20 dollars. Today, it is 5 times the IPO price. Deliveroo, backed by Amazon, was listed on March 31 on the London stock exchange (LSE). After markets opened, its issue price had a drop of nearly 26% on its first day. This drop washed away £2 billion approximately. Markets all over this world face the issue of overvaluation. 

India’s start-up ecosystem has drastically changed this year. Indian investors are more confident in taking risks on start-up. Technology related stocks are especially on the rise. But the valuation of such companies must be done with care and not with over enthusiasm to avoid a bubble. The questions to consider before investing are: are the companies innovative? Will their product or service have a material effect on the future economy? Despite this, there will still be risks involved, and only time will tell how many of these unicorns are economically sustainable.

References

1. https://www.businesstoday.in/magazine/bt500-indias-most-valuable-companies/story/bt500-will-unicorns-justify-their-high-valuations-312402-2021-11-17
2. https://www.businesstoday.in/latest/economy/story/will-paytms-poor-debut-hit-indian-start-up-ecosystems-funding-and-valuations-312803-2021-11-19