Why tech unicorns should avoid the IPO rush?

By Priyadarshi Nanu Pany*

Just how compelling is the Indian start-up story? From shaky, tentative steps in entrepreneurship to a stage where we are breeding unicorns. Today, India has 89 unicorns with a valuation totaling to over $290 billion with 44 unicorns added in calendar 2021 alone. If I take you through the journey of my home state Odisha, the emerging heartland of entrepreneurship, it’s striking. This eastern state has not just churned out unicorns but is fostering an ecosystem of nano unicorns- small or nano-scale businesses spawning employment. We have seen the compelling business growth of aspirational start-ups. But what’s next in their growth curve? Join the IPO bandwagon like other successful peers? I say this because the next 24 months will see 20 or more large start-ups hitting the IPO route to raise $12 billion.

Most new generation start-ups are awash with cash. Once they get the unicorn tag, the next milestone is public listing or an IPO. Perhaps, their frenzy stems from the roaring success of FAANG- the acronym for Facebook (now Meta), Amazon, Apple, Netflix and Google. Our unicorns believe they can unlock considerable wealth from the capital markets, and that isn’t a sour recipe for growth. The stunning success achieved by FAANG or Big Tech companies serves as a ready reckoner.

Some of our unicorns have seen spectacular growth in valuations over the past few years. Zomato had a roaring success at the stock markets, raising $1.2 billion via its IPO and inspiring the whole breed of the upcoming entrepreneurs to think big. In fact, the moment can’t be more opportune for unicorns to upgrade to decacorns (valued at over $10 billion) and beyond. There are a swarm of opportunities in funding. Plus, the tech unicorns have proved to be differentiators with their ingenuity.

Despite this halo of success, I feel a robust, sustainable business model counts more than valuations. We all know the carnage faced by Paytm stock post its much-vaunted IPO. Estimated at $2.5 billion, Paytm’s was the largest Indian IPO and the fourth largest for a Fintech company globally. Paytm had everything working in its favour for a stupendous bull run. Valued at $16 billion, Paytm’s parent company, One97 Communications, has the financial muscle of heavyweights such as Softbank and Berkshire Hathaway. Yet, it had a lacklustre show. Why?

The reason is in its obscure business model. The lack of a clear path to profitability dampened the market appetite. Paytm found it tough to justify its steep valuations. Countering the Paytm debacle are stellar IPOs by Zomato and Nykaa. Yet, I feel for a tech unicorn, an IPO is not the only growth accelerator. In the lure of listing, they should not get hijacked from the basics of business- revenue, profitability, business models, and fair pricing. The FOMO (Fear of Missing Out) factor is possibly impelling the start-ups to take the racy IPO route. While more stock listings by the successful unicorns augurs well for the economy, they need to sharpen focus on rudiments of business like a sustained cash flow, healthy margins and a vision for the future. Some start-ups have performed incredibly well in solving customer problems. Others need to focus on overcoming existing customer pain points with their tech innovations instead of creating a manufactured need like the 30-minute food delivery service or delivering groceries within 10 minutes. The digital economy needs more mature business models to enable the unicorns to list successfully and monetize their stocks. The road to a sustained bull run is a marathon, not a sprint.

*The author is founder & CEO of Bhubaneswar-based CSM Technologies.

DISCLAIMER: The views expressed in the article are solely those of the author and do not in any way represent the views of Sambad English.