In recent times, India’s stock market has surged to prominence, marking a notable ascension among the world's largest exchanges. This comes at a juncture when the private market begins to awaken from its prolonged slumber, heralding a period replete with both challenges and opportunities for startup founders considering going public. Let’s unpack the implications of these developments to help founders make informed decisions on going public.
The competitive edge of Indian markets
The allure of the Indian stock market has intensified, attributed to a substantial increase in total market capitalization, placing it prominently on the global stage. The Indian stock market surpassed $4.5 trillion market capitalization in January 2024, making it the next biggest behind those of the US, China and Japan.
This rise is underscored by compelling total shareholder returns and a distinct quality of liquidity attributed to domestic investors' significant contributions in recent years. Domestic investors have a deeper appreciation of and commitment to India's economic, regulatory, and financial fabric, and offer a stable foundation for the equity markets. However, as the retail investor base expands, welcoming many first-time market participants, a degree of volatility and unpredictability could ensue, the full extent of which remains to be seen.
Current multiples in the Indian market are higher. A positive long-term outlook for the Indian economy and companies supports higher multiples. This optimism is based on anticipated robust GDP growth and consumption, suggesting that Indian companies will likely deliver superior long-term growth. This scenario of higher "terminal value" justifies the higher multiples. In addition, supply-demand dynamics also drive stock prices higher. The scarcity of high-quality stocks relative to the influx of new investors could be pushing prices upwards.
Thus, the Indian stock markets present a uniquely compelling proposition for startups contemplating a public listing. The presence of a large domestic investor base, well-versed in the intricacies of the local economy and regulatory landscape, promises a pool of committed long-term shareholders.
Navigating regulatory and non-financial considerations
However, there are several reasons why Indian startups have not yet tapped the public markets in droves.
The lack of a conducive regulatory environment for startups is a challenge. India lacks a dedicated stock exchange for startups, unlike the US, which has the Nasdaq, or China, which has the STAR Market. The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have norms suitable for traditional companies which may not be suitable for high-growth investment-oriented long-dated-cash-flow technology companies, such as profitability criteria, minimum promoter holding, lock-in periods, and disclosure requirements.
However, a significant milestone could be the recent authorization for Indian companies to directly list shares on GIFT City’s exchanges. This could boost domestic and foreign investment flows into Indian companies and bring valuations in alignment with global benchmarks. The broader investor base would enhance coverage of Indian companies and “India story” across global investors. For startup founders, it could represent an opportunity to flexibly raise from domestic investors, benefiting from their local understanding and commitment, and raise from foreign investors, benefitting from their global perspective. As they say, the proof of the pudding is in the eating – while this approval is a boon for startups, its operational construct and effectiveness are to be seen.
The cost and complexity of going public in India is higher. According to experts, the average cost of an IPO in India is 7% of the proceeds, compared to 4% in the US and 2% in China. The IPO process involving multiple intermediaries, such as investment bankers, auditors, lawyers, and regulators, can take up to 12 months to complete. Improvements in process and documentation and increasing sophistication of all involved parties could bring these costs down over time.
Lastly, the scrutiny and accountability from the public and the regulators may expose vulnerabilities. The startups have to disclose their financial and operational performance, governance structure, risk factors, and future plans to the public, and comply with the regulatory norms and standards. This may expose weaknesses, such as losses, and negative cash flows, but also vulnerabilities such as, legal disputes, product, pricing, and go-to-market strategy, to competition.
Broader market implications and the path forward
The shifting sands of India's IPO landscape signify profound implications for the startup ecosystem, the global investment community and the broader economy.
For the startup ecosystem, IPOs provide an important wealth-creation moment for founders, employees, and investors. The realised capital can then be reinvested into the next crop of startups and in the local economy. Going public allows companies to attract and retain better management and employees through liquid equity participation. IPOs provide a new and evergreen source of capital for companies to invest in their continued growth. Successful IPOs raise the aspirations of the entire ecosystem inspiring founders to pursue their dreams and drive innovation.
Investors benefit by exiting their investments through IPOs to earn returns and reinvest the capital in new companies. More importantly, IPOs provide an important benchmark for the scale and success of innovation in a country. They attract new domestic and international investors to not only provide capital but also mentorship and network to help build the next generation of companies.
Increased IPO activity is beneficial for the broader economy as well. It promotes greater entrepreneurship and innovation in the country. The growth of technology companies creates highly skilled jobs, develops innovation hubs and encourages research and development activities and education institutions. It holds the promise of providing an enduring edge in new emerging technologies.
We, at QED Investors, have partnered with several of our portfolio companies to think through the IPO decision. Notable recent examples are Nubank from Brazil and Remitly in the US. The high-quality public listings have liberated the companies to chase their aspirations.
Embracing ascendancy
With growing interest in equity investments, a deeper appreciation of the "India story," and avenues for both domestic and international capital inflow, India’s stock markets present a fertile ground for IPOs. While regulatory and market challenges exist, the potential for growth, innovation, and success is significant. For startup founders, this landscape offers access to evergreen and supportive long-term capital and promises opportunities for growth, innovation, and sustained success.
Looking forward, the narrative surrounding Indian startups is imbued with optimism and opportunity. The anticipated growth in the IPO landscape, powered by a robust understanding of market dynamics and investor behaviour, signals a bright future for the startup ecosystem and the economy alike.
Sandeep C Patil is Partner and the Head of Asia Investments for QED Investors, a US-based venture capital firm specialising in fintech.
