As one of the fastest growing technology startup markets in the world, India is on its way to a point where startups will seek exits through public listings.
Ola, India’s answer to Uber, is a candidate. It has started working on an IPO plan, per local media Entrackr citing people familiar with the matter. Earlier last month, the Bengaluru-based company, valued at more than USD 6 billion, raised a new round of USD 5 million from a Seoul-based special purpose vehicle called ARK Ola Pre IPO Private Investment Trust, that suggests Ola is preparing to go public. ARK Impact is a Seoul based asset management firm whose board of directors include Mr Jae-Hun Jung, a senior Hyundai executive. Hyundai is also one of the strategic investors in the ride-hailing unicorn.
In July 2018, Ola co-founder Bhavish Aggarwal said his company was making a profit on every ride and would soon become cash-flow positive. At that time, he and co-founder Ankit Bhati said they were aiming for an IPO in the next three to four years.
Apart from Ola, other technology startups such as online premium furniture retailer Pepperfry, B2B company Druva, and Freshworks, among a few others, are aiming for an exit via IPO within next couple of years. Eleven-year-old enterprise software company Kaleyra is looking to raise USD 192 million on the New York Stock Exchange (NYSE).
We talked to Ashish Fafadia, the chief financial officer at Blume Ventures about the proposed IPO plans of Indian entrepreneurs and if he thinks the Indian startup ecosystem is ready for multiple public listings.
KrASIA (Kr): Many tech entrepreneurs in the recent past have talked about taking their company public. Seeing the increasing gap between their yearly loss and revenue, do you think Indian companies will be ready for an IPO in a couple of years, or is it just talk?
 Ashish Fafadia (AF): I don’t think it’s just talk. IPO is a function of two to three things. The moment a company thinks of going for an IPO they need to be very convinced of the fact that they will be able to manage investor’s expectations and eventually move towards great unit economics and profitability.
They must have the appetite for the institutional market. FPI (foreign portfolio investment) and FII (foreign institutional investment) are very different from FDI (foreign direct investment) investors. Companies have been built in the startup ecosystem using FDI money. Now when you are moving towards the bigger pond you will be growing on owned cash flows and FII money which is a different ball game and is run by a very different expectation both on IRR (internal rate of return) front as well as predictability of the company’s growth.
Founders and the management should be prepared to cater to those set of investors also. Nobody should go down that path without considering these factors.
Going for an actual IPO and raising money through ‘offer for sale’ where you sell your stakes to institutional investors in the market, are two different things. I think now the companies will go for ‘offer for sale’ and use it as an opportunity to give exit to the investors and not merely list.
Kr: By when do you see IPO becoming a norm in India?
AF: We are two to three years away from listings to be taken seriously and may be five years away from it becoming a norm. The bigger question here is, do we have the ingredients so that we can prepare today to make it a norm in years to come?
In my view the answer is a big no. We can’t live without this becoming a norm. There are so many investors coming into India, SoftBank, Tiger, and the only way to live up to their expectations is to deliver high growth and IRRs and IPOs will just bring about a sense of completeness to Indian market.
We will check the box of delivery only when the investors investing in India have started getting healthy IRRs and ability to exit. So it’s best that we make these IPOs / listings happen.
We need some case studies, where we see companies raise money, give exits to the investors from whom they have taken money using public market platforms. Once that happens and we have a few case studies to learn from, everyone will keep that in mind while running the company and it will be on track to become a norm.
Kr:Â Once a company has started making money, how long it should wait before going public?
AF: Ideally it should be a journey of five to ten years. We have companies that are more than ten years old and still have not gone public. It will take much more time and eventually it will come down to a cycle where there will be a USD 500 million market cap IPO as well as a USD 5 billion market cap IPO co-existing together.
Kr: One of the criteria to go public is profitability. But that looks like a distant dream for Indian tech companies. As an investor, what’s the reason for that?
AF: There are two things: so far the capital is available in abundance and there is no set rule for when a a company should be IPO-ready or a profitable. There is a reason why these private or venture growth investors come in. They see the valuation and pricing in a very different way as compared to public markets.
The market knows the fact that if I have to keep growing, I only have venture and hedge fund money to raise because that’s when people will resonate with the valuation theory. Till such time global private capital is continuously flowing into the company, automatically the orientation will be towards growth at the cost of profitability, rather than a push for profitability.
The sign of ecosystem maturing is when the companies themselves say that now the cycle has to complete and we should aim for profitability. At the same time investors should be able to tell entrepreneurs that “our horizon when we came in was 10 years as a market builder, but now the cycle has to be played out much faster.” So we won’t allow companies to remain private for too long and ask them to go public in some point in time. That is also the time when they get the conviction that the company will be able to grow fundamentally on their own unit economics and cash flow because public market has its own challenges.
Right now investors don’t think companies are ready, that’s why they are choosing to keep them private and funding them to buy the growth or market access at consumer internet companies level.
