The Story

In February, audio wear company boAt announced that it was ready

to go public. They put together the paperwork, drummed up support
and were all set to raise money from the public. But just a couple of
weeks ago, boAt decided to abandon those plans. Not necessarily
abandon, but froze all plans for now.

And boAt isn’t the only one to do this. Used-car marketplace Droom
and online pharmacy PharmEasy have also pulled the plug on their
IPOs. Even fintech major Mobikwik seems to have shelved all plans
to go public for now.

So this begs the question — Why?

After all, the Indian stock market is doing pretty well. Some indices
have even hit all-time highs and domestic investors continue to pour
money into the market. This kind of environment should be ideal for
an IPO no? Especially when you see other “boring” companies go
public— 35-year-old snack firms, cable manufacturers, NBFCs and
chemical companies. So why are tech companies getting cold feet?

Well, let’s go back to something we wrote during boAt’s first IPO

announcement.
You see, in January 2021 boAt raised $100 million from PE firm
Warburg Pincus. It was valued at $300 million. But when the IPO
was announced, boAt’s valuation suddenly jumped 7x. To nearly $2
billion.

What was the rationale for this massive jump in valuation?

We don’t know. Maybe it was simply because they could command

anything they desired!

People were going gaga over these ‘new-age’ companies. Everyone

wanted to bet on startups. VC firms had poured $38.5 billion into
Indian startups in 2021–3.8 times as much as they did in 2020!

So you could argue that most tech companies felt that they could
extend these inflated valuations to the public markets as well.

But the reality is that the public markets don’t operate the same
way private markets do.

Private investors are okay with playing the long game. They’re
happy if a company delivers on revenue growth and adds new users.
They’re hoping companies can create categories of their own and
they aren’t too focused on the bottom line.

But public markets want to see one thing — profits. And they want to
see it every quarter, trending upwards. So you can imagine that
start-ups burning boatloads of cash won’t make them too happy.

Just look at what happened in 2021 when plenty of new-age

companies went to Dalal Street. We’re talking about the likes of
PayTM, Zomato, CarTrade, and Nykaa. These companies bet that
people would pay through their noses just to get their hands on
these stocks.

But they’ve had no such luck. Most of them are trading at 50%
below the price at which they first listed on the stock exchanges.

And it finally looks like the ‘new-age’ companies have woken up and
smelt the coffee. It doesn’t matter that the Sensex and Nifty are
doing fairly well. Tech companies aren’t in favour. And they probably
won’t be until they show profits. That’s why many of them have
resorted to layoffs as well. They’re trying to cut costs as quickly as
possible.
Even bankers could be hesitant to support tech IPOs at exorbitant
valuations.

Because here’s the thing…when bankers serve as advisors on these

IPOs, they also have to ‘underwrite’ it. This means that if the IPO
sees lacklustre demand and the shares aren’t lapped up, the bank
may have to step in and buy the shares itself. Now a bank wouldn’t
want to end up damaging its own bottom line by buying shares at
insane valuations, no?

But there’s something else…

Market regulator SEBI has been watching all this with a hawk’s eye.
They’ve seen the exorbitant valuations.

And last month, they took some action.

Now, companies have to make more disclosures before going

public. They have to explain how they price the IPO. Sure, SEBI
won’t tell companies how to price their issue. But it will ask them to
shed some light on the process itself.

The thing is disclosures in a 500-page document alone may not

amount to much. Investors knew these companies were loss-
making. Yet, they invested in these stocks anyway.

So what else can SEBI do?

Maybe it can create an implicit barrier. The regulator seems to have

slammed the brakes on doling out IPO approvals. See once a
company files their documents, SEBI takes some time to go through
it all. They want to make sure that the issue doesn’t damage
prospective investors. And it takes time to do this. In 2020 and
2021, SEBI took 75 days on average to grant approvals.

But in 2022, the average has jumped by 50%!!! Companies are now
having to wait for 115 days to know their fate. The last time the
regulator took so long to clear IPOs was way back in 2014.
Put all this together and you can see why ‘new-age’ companies are
being ultra-cautious now. They don’t want a bad rep. And they don’t
want to get on the wrong side of SEBI. They’d much rather wait and
weather the storm.

Okay, but hold on now…aren’t IPOs lined up when companies are in

need of money to expand and stuff? Where will they get the money
now?

That’s true. But only partly.

You see, an IPO is the holy grail for any company. It’s a sign that the
company is a legitimate enterprise that’s serious about making a
mark in the world. For ‘new-age companies’, going public is
validation. A sign that they’ve made it. They may not have
necessarily needed the money.

And in case they did, well, they could always turn to the private
markets again. Raise money from PEs and VCs — as boAt did by
raising ₹500 crores.

What about the funding winter in the VC world, you ask?

Well, the winter isn’t because money isn’t readily available. It’s
simply because the environment is so uncertain that VC firms are
not sure which companies to take a punt on anymore. In fact, Inc42
says that Indian VCs are sitting on $16 billion worth of dry powder
(money that’s ready and simply waiting to be deployed).

So in many cases, VCs are willing to bet a chunk of the money on

companies that have already shown some promise. They want to
back horses that have proven they can win the race.

So yeah, there’s money for now. And it could be just a temporary lull
for ‘new-age’ tech IPOs. They’ll be back. When? We don’t know yet.