The stock performances of tech IPOs compared to other consumer companies have seen a steeper crash. The big reason behind this is the global macro situation, as profits are a lot more valuable in the current situation. Moreover, tech companies have now prioritized growth, finds a recent report by Redseer Strategy Consultants, authored in collaboration with HSBC. The report was launched at Ground Zero 7.0, a new-age business summit hosted by Redseer Strategy Consultants.
Learnings from the past events
A typical company that would be cash flow positive two years from now would see discounting of at least 20-30% of their valuations in a low-interest rate situation, which goes up significantly in a high-interest rate situation which we are seeing right now.
“When we look at similar situations in the past 20-odd years, we realize that it still takes a bit of time for markets to come back sustainably, even after the interest rates start dropping. Because, in effect, the market rates would have already factored in the decreasing interest rates into the prices. The learning is that there may be more time, maybe a few quarters, for the markets to recover. We always see IPOs bouncing back post downturns,” says Rohan Agarwal, Partner, Redseer Strategy Consultants.
India has significant room for growth
India, in particular, has significant room for growth in public market cap compared to other countries. This becomes even more pronounced when we compare this to the tech/new age ecosystem. From about $43 trillion market capitalization in the US, about 25% can be attributed to tech/new age companies; this includes giants like Apple, Amazon etc. In India, with about a $3.9 trillion market capitalization, only about 1% can be attributed to tech/new age companies.
Take the deliberate and goal-based approach to be IPO ready
India may see 100+ matured, large-scale profitable/path-to-profitability start-ups in the next five years. With about 20 of them already being listed, about 80 start-ups have the potential to look at an IPO journey.
While the markets have been challenged, which has impacted the valuation of the tech companies a bit more than others, the potential is out there, especially for tech.
“There must be a deliberate and goal-based approach to be IPO ready,” says Rohan adding, “Whatever the goals may be, you have the time and scope to achieve much better outcomes before the IPO and showcase it strongly,” he added.
There are a lot of metrics here that the start-up will need to focus on in their IPO journey, including market leadership, clearly visible TAM, moats/multiple use cases, diversified, consumer love, predictable revenues, high operating leverage, achieved sustainable unit economics and a clear path to profitability.
“We have learnt from the ecosystem stakeholders, bankers and public market investors that, for going public, one still needs a lot of relationship development early in the journey and not closer to the event. Engagements need to be at least two years ahead of the event. CFOs should have an independent stand that the investors should look forward to. Finally, building strong governance that you as a company have and follow leaves little room for surprises,” he added.
