In case you’ve not been paying attention, we’ll say it again: The global venture capital industry is on fire. The second quarter of 2021 was the largest single three-month period on record for dollars invested.
The data coming in points to a worldwide boom. The United States’ startup market had a huge Q2, and investors don’t expect the pace to slow in the country. Europe is also having one hell of a year. Around the world, 2021 is shaping up to be a breakout year for venture investment into startups. And that’s after several years of growing, record-breaking results.
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India is another good example of this trend. The country’s venture capital haul thus far in 2021 has nearly matched its 2020 total and is on pace for a record year. But as the third quarter gets underway, something perhaps even more important is going on: public-market liquidity.
The new trend is being spearheaded by Zomato, an Indian food delivery giant that could be valued at $8.6 billion in its public debut. Other major Indian unicorns are following it to the public markets, including fintech players like MobiKwik and Paytm, which is backed by Alibaba and its affiliate Ant Financial. The trio of companies could herald a rush of public offerings from Indian companies if their debuts prove lucrative and stable.
Today, The Exchange is taking a look at India’s recent venture capital results and digging more deeply into the country’s IPO pipeline, with help from VCs Kunal Bajaj of Blume Ventures and Manish Singhal of pi Ventures. We’ll also read the tea leaves when it comes to how Zomato’s IPO is performing thus far, and what we can learn from its early data. This will be fun!
An explosive startup market
Data coming from the Indian startup market paints a picture of an aggressive attitude from venture capitalists hungry to put capital to work in the country’s early-stage tech companies. With some $10.4 billion invested into Indian upstarts so far this year, India has nearly matched its 2020 venture totals ($11.6 billion, data via Tracxn as reported by TechCrunch).
The influx is having an impact, with round sizes growing rapidly for seed and other early-stage startups in the country. And late-stage deal-making is hardly slouching. Per pi Ventures founding partner Singhal, “later-stage growth rounds have seen a massive upswing in the round sizes, valuations and the velocity due to the participation of hedge funds and other larger international investors.”
Mega-rounds have also become a staple, resulting in at least 16 new unicorns being minted so far this year. If the $3.6 billion Flipkart fundraise is any indication, there’s an appetite for rounds that stretch into the billions of dollars for leading Indian technology companies.
Driving India’s boom in demand is a growing population of smartphone owners and young adults. Paytm’s IPO filing contains a wealth of data on the matter (the company commissioned the data from RedSeer Management Consulting for its prospectus). For example, the fintech company’s public offering documents note that India’s working-age population is second only to China’s (745 million compared to 849 million), but with a far-younger average age of 28 compared to 38 in its northern rival.
Per Paytm’s data, there are some 700 million Gen Z and millennial humans in India. Mix that fact with rising smartphone penetration — thanks in part to telco Reliance Jio, which itself has attracted huge sums from investors and tech companies alike — and you have a young, mobile population with incomes rising thanks to GDP expansion in the country. It’s a potent mix that allows tech companies to try new models and import ideas from abroad that may resonate in India.
It’s no surprise, then, that venture capitalists have proven bullish on the country’s startup market.
“The Indian ecosystem has been seeing record amounts and velocity of investments driven by both maturation of the market as well as macro factors around India,” Singhal said. “This, coupled with the negative sentiment around the China market, [is] driving greater [foreign direct investment] into Indian startups.”
Meanwhile, Bajaj, Blume’s head of capital markets, noted that “any slack in deal activity across [Indian] early-stage, growth-stage and pre-IPO startups from Chinese investors has more than been taken up by U.S. investors.” The country’s ecosystem is also recovering well from COVID-19, he added. “The pandemic has forced startups to focus on margins and profitability earlier than ever, and those who have managed to make this transition have found even more investor love and emerged stronger post the COVID-19 pandemic.”
The next test for India’s startups and unicorns, however, is finding the exit. That’s why TechCrunch is paying as much attention to the Zomato IPO as we are: If the company trades well, it could unlock a wave of public offerings from domestic startups.
There are a host of candidates on tap. In a March 2021 report, Credit Suisse counted no fewer than 100 Indian unicorns, with a combined market capitalization of $240 billion, and several of them are considered strong IPO candidates. This includes above-mentioned Flipkart, which is now valued at a whopping $37.6 billion; edtech heavyweight Byju’s with its $16.5 billion valuation; ride-hailing market leader Ola, which mentioned that its $500 million round earlier this month was coming “ahead of IPO”; Tiger- and SoftBank-backed insurance aggregator Policybazaar; delivery startup Delhivery, which just announced a $100 million investment from FedEx Express; and makeup retailer Nykaa, whose competitor Purplle just raised $45 million.
An appetite for losses?
The global stock market is not a single organism; norms differ and the valuation that a company may be able to command on the U.S. Nasdaq, for example, may be different from what the same firm is able to manage in its domestic market.
Zomato’s IPO, oft heralded as the first unicorn offering in India, is, therefore, a sort of test. What demand will there be for shares in the loss-making, growth-focused company? It’s not an idle question; Paytm is also unprofitable, for example. Many, if not most, unicorns in the world fail to turn a profit, choosing to instead focus on near-term growth.
The food delivery company’s public offering will provide investors and unicorns alike with a heat check of the Indian stock market.
How are things shaping up? During its sale period this week, demand for Zomato’s IPO shares was far greater than supply. Early indications were strong, which bore out during the week. Per the Economic Times, Zomato’s IPO “attracted bids for 27,51,27,77,370 shares, 38.25 times the issue size of 71,92,33,522 shares.” That’s a staggering mismatch between shares available and demand for said equity.
We won’t know for a few days how Zomato will perform when it actually begins to trade, but current data is at least bullish-leaning. Given that fact, the Paytm and MobiKwik IPOs are likely looking to list in an attractive market. That should help get other unicorns off the bench and jogging toward debuts of their own.
In a sense, the current IPO cycle is confirmation of India’s startup and venture capital boom; these exits will begin recycling capital back into the country’s upstart tech firms, providing more venture funding and, perhaps, more exits down the road.
The simple fact that these exits are taking place is an important milestone for the market. Bajaj noted that “2021 looks like it’s going to be a transformational year for India as a growth investment destination. This is the real takeoff point for venture as it allows many institutions to have a lot more comfort with investing in India earlier, and the comfort of an exit within a reasonable time frame.”
There are issues to consider, of course. The Indian government is increasingly autocratic — though it is hardly the only country in the world dealing with such an issue — and a growing rivalry with China could also impact India’s economy negatively. But with demographics in its favor, India is set to have a long period of economic growth ahead, a fact that could provide a fertile bed for more startups and unicorns to grow.
On a more micro level, companies going public need to remember that listed markets can be punishing, Bajaj warned.
“Companies that go public must imbibe the discipline of financial planning, guiding and forecasting the street on their annual and quarterly numbers, with the knowledge that their stock price will be punished for poor business growth. There are of course incredible benefits to an IPO, too — being listed builds better liquidity and helps in attracting talent with stock awards and stock options, and enhanced credit facilities by banks for working capital and long-term business growth.”
Let’s see if the Zomato IPO lives up to expectations as we understand them today. If so, get ready for lots more news from Indian unicorns.