From Startup to IPO
As an analyst at an early stage venture fund, and investor in the stock market, I’m very interested in startups that go public. From 2021 till now, 41 startups have gone public. Of these, 18 were started before 2010 and 23 were started between 2010 and 2020. The median time from when they started to when they went public was 12 years.
However, I have one key observation, which actually made me write this essay: practically none of them have generated enough profits to payback the capital that they'd raised. Claude tells me 4 of the 41 actually have, but that makes them the exceptions.
I think there were structural reasons behind why that’s the case, and that the next generation of startups that will go public, from 2030 onwards, will have to prove a lot more. I’ll divide this into business perspective, investment perspective, and then share implications for the future.
Business Perspective
I see these companies as the foundational cohort of Indian tech startups going public. They, along with a lot of other startups that haven’t gone public or even have shut down, practically created the startup ecosystem.
Swiggy and Zomato scaled at-home food ordering and delivery. Flipkart, Amazon, and Meesho brought e-commerce to India. Delhivery built the logistics infrastructure for the country. Paytm introduced wallets at a time, when even UPI didn’t exist. Fintechs like Pine Labs, PayU, Razorpay, BharatPe drove adoption of digital payments among consumers and businesses. Ola and Uber made it convenient to ride with a stranger taxi or auto driver. Nykaa convinced people to buy beauty and personal products on the internet. Lenskart did the same with eyewear. Urban Company made you trust a service worker coming into your house for repairs. Groww and Zerodha (not venture funded but tech startup nevertheless) brought in crores of investors by digitising investing.
One can argue that most of these products/services existed in the pre-startup world too but that’s a substantial reduction to their effort in digitising our economy. First, they had to build the technology, and the digital and physical infrastructure. Then, they had to build tech-first products, digital and direct-to-consumer distribution systems, which led to newer business models. Along with this, they also had to create demand from buyers – whether for newer products, or for newer ways of doing things.
Naturally, this required huge amounts of capital investment, and patient holding periods. This was only possible by staying private. Late-stage private investors like Tiger and SoftBank had the ability to deploy 100s of millions of dollars, and the stomach to prioritise innovation over profitability. They funded market creation. This also meant that IPOs were almost treated as the outcome, rather than an important but transitional achievement.
Investment Perspective
While 41 is a sizeable cohort, tech startups hardly have any vintage as public companies. Public market investors didn’t have a playbook on how to analyse these businesses – companies growing at 50-100% per year, deeply loss-making, in categories that didn’t exist previously. Hence, there were no frameworks to value them. Then, we’ve also had companies like Byju's, Unacademy, Oyo, that raised massive amounts of funding but either went bust, or are struggling, or withdrew their IPO applications – even a few stories like this create massive skepticism among public market investors.
With time and performance data, the public markets are learning how to analyse them. This has already started to reflect in their valuations. Most of these companies have had highly volatile stock prices, and about half are still trading below their IPO price. Startups are learning that business substance and financial discipline are non-negotiable as a public company. They can no longer make future promises, they must also deliver, or be ready to face immediate consequences.
My sense is that by 2030, we’d have a fairly large sample size of startups that have gone public, along with reasonably long vintages, for the public market to track their business performance, and build valuation frameworks.
What Happens Next
I think there are two important implications of the evolving business and investment landscapes.
Startups will Need to Prove More
For the most part, the business ecosystem now offers enough to startups. There’s still a long way to go and true innovation might face the same challenges as the previous generation. However, several challenges related to technology, infrastructure, distribution, awareness, are decently solved, and most startups will need to work more on product, distribution, and economics.
This directly means that investors will demand that startups be more capital efficient. Along with reaching meaningful revenue scale, they’d also have to prove profitability, and return on capital. I imagine the playbook will look like this – scale to a certain revenue, then turn profitable, then again scale to a higher revenue, then turn profitable, repeat this twice or thrice to get to a revenue scale and profit margins that public markets can work with.
Startups can Go Public Early
We no longer have Tiger or SoftBank to write $100mn cheques, and there are hardly any domestic investors who can do that. However, public markets investors are increasingly becoming interested in tech startups, if you take pre-IPO activity as any indication. I think this presents a unique opportunity for startups to go public much earlier in their journey and give public market investors a higher share of the potential upside.
I think the bar to going public could come down to as low as ₹4,000-₹5,000cr in valuation, with revenue scale of ₹600-₹900cr, and 10%+ EBITDA margins. I am willing to wager that a lot of these companies can achieve this by raising less than ₹1,000cr. Most importantly, this creates a lot of depth in domestic capital, and is a win-win for startups and investors.