The wearable audio equipment manufacturer boAt decided to pursue an initial public offering (IPO) in February. They organised the necessary paperwork, gathered support, and got themselves ready to ask the general public for funds. Despite this, boAt made the decision a couple of weeks ago to abandon these aspirations. Not necessarily forsake, but put on hold for the time being all goals and endeavours.
And boAt is not the only company that exhibits this behaviour. PharmEasy, an online pharmacy, and Droom, an online marketplace for old autos, have both decided to pull their initial public offerings from the market. Even the well-known financial company Mobikwik seems to have given up on its plans to introduce its stock to the public market for the time being.
This goes against the current tendencies in the market. The performance of the Indian stock market has been positive recently. Even though some indices have reached their all-time highs, money is still being invested in the market by domestic investors. This kind of atmosphere should be great for an IPO, particularly when you see other “not so interesting companies” go public, such as snack companies that are 35 years old, cable manufacturers, NBFCs, and chemical companies. Tech initial public offerings are starting to lose their appetite.
Public vs Private markets
In January 2021, boAt was able to secure $100 million in funding from the private equity company Warburg Pincus. It was estimated to be worth $300 million. But once the news of the IPO was released, boAt’s valuation shot up by a factor of seven to close to two billion dollars. boAt had the ability to set the pricing.
People couldn’t get enough of these purportedly “new-age” businesses. Everyone was interested in placing bets on new businesses. In 2021, venture capital firms had invested $38.5 billion into Indian businesses, which was 3.8 times the amount that they had invested in 2020. One might make the case that the vast majority of technology businesses believed they could transfer their inflated valuations to the public markets as well.
However, in contrast to private markets, public markets do not function similarly to private markets. Paytm and LIC IPOs have taught the market well.
The concept of long game is acceptable to private investors. They consider it a success for a firm if it meets its revenue goals and continues to attract new customers. They are anticipating that businesses will develop their own categories and won’t be overly concerned with their financial performance.
However, public markets are only interested in one thing: profits. And they want to see it every quarter, and they want it to be going in the right direction. Therefore, it is reasonable to assume that start-ups that waste massive amounts of cash won’t make them particularly pleased.
Companies like PayTM, Zomato, CarTrade, and Nykaa are examples of how not to price IPOs. These businesses made the wager that customers would pay through the nose in order to acquire these stocks, and they were right. The majority of them are currently trading at prices that are fifty per cent lower than the price at which they were initially listed on the stock exchanges.
The so-called “new age” businesses have now come to their senses. It makes no difference that the Sensex and the Nifty are both performing reasonably well. The tech industry does not support this measure. And it’s quite unlikely that they will be until they start showing a profit. Because of this, many of them have also resorted to laying off some of their employees. They are making efforts to reduce expenses as rapidly as they can.
When bankers serve as advisors on these initial public offerings (IPOs), they must ‘underwrite’ the transaction. This could cause the bankers to be reluctant to support tech IPOs at extravagant prices. If there is a lacklustre demand for the IPO and investors do not quickly purchase the shares, the bank may be forced to step in and buy the shares themselves. Now, a financial institution would want to avoid ending up hurting its own bottom line as a result of purchasing shares at absurd valuations.
The authority that regulates the market, SEBI, has been keeping a close eye on all of this. They are aware of the astronomically high valuations. And they did something about it the previous month. Before going public, companies are now required to provide more information than in the past. They are obligated to discuss the methodology behind the IPO pricing. It’s true that SEBI won’t instruct companies on how to set the price of their offering. On the other hand, it will ask them whether they can provide some light on the procedure itself.
The difficulty is that the disclosures in a paper that is 500 pages long might amount to little on its own. Investors were aware that these businesses were operating at a loss. Despite this, they decided to put their money into these stocks.
No bad Rep
Because of this, “new age” companies are exercising an extreme amount of caution. They wish to avoid getting a poor reputation. In addition, they wish to avoid conflict with the SEBI at all costs. They would much rather wait and ride out the storm than do anything else. There are a variety of additional places where money can be obtained.
The initial public offering (IPO) is the pinnacle of success for any company. It is evident that the corporation is a real business that takes its mission of leaving its impact on the world very seriously. Going public is a validation step for so-called “new-age enterprises.” An indication that they’ve finally arrived. It’s possible that they didn’t need the money at all.
And in the event that they did, well, they could always try their luck in the private markets once more. Raise capital from private equity investors and venture capitalists, the same as how boAt achieved it by raising 500 crores.
VCs have got cautious too
Because the environment is so unstable, venture capital firms need to be clearer about which companies they should risk their money. According to an article published by Inc42, Indian venture capitalists have ready access to $16 billion in funds just waiting to be used.
Therefore, in many situations, venture capitalists are willing to place a portion of their money on companies that have previously demonstrated some degree of potential.
There is money available at this time. This slowdown in ‘new age’ technology IPOs may be only a transient phenomenon. They will come back at some point.