India has seen a huge growth in unicorns in recent times, emerging as the third largest home to unicorns after China and the US. And while these companies have grown to these astronomical heights on the back of private capital, many of them may soon be looking to list. The question now is, are the Indian public markets ready for them.
Through the years, multiple venture capitalists and investors have brought this issue up, but it has continued to go unaddressed. Potentially inflated valuations, fear over lack of sufficient market depth, tighter listing regulations, and lack of sufficient investor expertise in valuing and investing in high-growth names are all things holding us back. But with the phenomenal vibrancy and value these names could bring to the Indian market, is it time to go back to the drawing board and work on ways to allow these into the market?
Let us try to address each of these issues one by one. Startups being penalized for the first seems justified. Mega VC/Vision funds flushed with cheap capital sometimes tend to inflate the valuation of startups beyond what they deserve. While the vision and growth are certainly important, there needs to be a path to profitability as well. When these do not appear, public markets will often devalue these names significantly as we saw with Uber, Lyft, and Slack listings, as well as the cancelled WeWork IPO.
The next three however are ones that can definitely be addressed. Given the promise that these tech companies show, and a high likelihood that in 10-20 years from now these would be dominant parts of the index, investing right now in building high quality research capabilities for tech companies, perhaps with assistance from international colleagues will certainly pay off. On the regulatory front SEBI has been working consistently to make novel platforms including the likes of the Innovative Growth Platform to accommodate businesses that wouldn't traditionally be accepted. Given they have the likes of Mohandas Pai on their board who has been a champion of many startups himself, there certainly seems to be scope for more improvements on this front. And on matters of capital, atleast for the big brand names with good name recognition, there should be a good amount of retail as well as institutional interest that can be generated, not as much as you could generate in the US markets perhaps, but still quite sufficient.
That being said, the allure of the US market which has handled hundreds of such tech business listings, and consequently makes raising capital there a lot easier will certainly continue to persist. Freshworks, one of the SaaS unicorns is believed to be considering a NASDAQ listing in 2021. The next 2-3 years therefore present a very unique and limited opportunity for the Indian markets to try to step up its game and get these firms to list in India. And it's an opportunity that we should certainly try to make the most of.
Zapp 5: (Day's 5 top stories in 3 lines or less)
1. Sensex surges 170 points: Reports of the US delaying tariffs beyond the Sunday meeting cheered market globally; PSUs rose on hopes of govt. divestment.
2. S&P may slash India rating: Both S&P and Asian development bank slashed India's FY20 growth rate to 5.1%. Credit crunch and weaker domestic demand were highlighted by the ADB.
3. Coal sees continued slowdown: Slower demand and cheaper alternate fuels will lead to a shrinking in coal's use for power generation for the first time in 14 years.
4. Adani sells 25.1% stake in Mumbai arm: Qatar Investment Authority purchase stake in the arm that provides 55% of Mumbai's electricity.
5. Google and Facebook drop out of the list of 10 best places to work: Employee backlash against management positions is seen as one of the contributing factors of the fall.
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