More IPO losses than wins: India’s storied startups failing investors in the stock market

India’s startup ecosystem draws a lot of eyeballs in the keenly watched economic space of the country. There is a lot of promise, innovation and disruption. Then they decide for an IPO, and this is where most of them face an unforgiving nature of public gaze.

From Paytm to Zomato to Mobikwik, of the last 15 startup IPOs that came after Paytm's high-profile debut, 8 are now trading below their issue prices in quite a stark turn of fortunes after the listing.

Among the most talked about ones, barring Zomato (which is trading an impressive 200% above the issue price), PB Fintech and Netweb, most others have sunk below their issue levels.



For instance, Paytm is down as much as 65% from the issue price. The digital payments major was one of the first among new-age tech companies that came into public markets.

Paytm debuted at a staggering valuation of Rs 1.6 lakh crore in 2021 and then it all went downhill. There were questions over its path to profitability, high cash burn, and competition from rivals like PhonePe and Google Pay.

Regulatory bombshell in its core payments banking business further dented investor confidence. The current market cap of Paytm is around 48,105, reflecting a significant dip from where it debuted.

Analysts say IPOs cluster in the latter stages of bull markets when investors are most willing to assign astronomical multiples. The underperformance is not surprising given that some of these companies entered the market with expensive valuations.

There are also a lot of expectations from these companies to do well, because investing in such names, usually, will be done on overt promises.

Startups often tell a story that focuses on capturing the vast markets that they are operating in rather than a talk around profitability. This leads to inflated pricing on the promise of robust future growth.

Often it is also the case that venture capitalists, who are early investors in these companies, would always look for maximising returns in an IPO often at the cost of expensive valuations.

"Early-stage investors have defined time horizons leading them to push for aggressive valuations to secure 10–20x returns. Underpricing an IPO, while good for investors, would mean leaving money on the table from the investment banks’ perspective," said Anoop Vijaykumar, Investments & Head of Research at Capitalmind.

Further, category-creator startups often don’t have directly comparable peers, which can also lead to overvaluation because there is no frame of reference for investors to compare against.

If we take another example, Delhivery has also turned out to be a significant wealth destroyer. The company went public 2022 with a market cap of Rs 38,000 crore and its price nearly halved from the IPO. Nykaa and Ola Electric also share a similar sombre story on the exchanges.

Some startups have struggled to maintain the high growth rates they showcased before their IPO. Why don't they do it? At the time of IPOs, startups may have the revenue to justify their listing, but lack the operational depth to sustain public market scrutiny.

"Too often, startups treat an IPO as the finish line when, in reality, it’s just the beginning of an entirely new game," says Ashutosh Jha, General Partner at Expert Dojo, a US-based VC firm. "Public investors aren’t looking for bold promises; they want clear, profitable growth."

Market sentiment has also turned more selective, rewarding companies with clear revenue visibility and profitability while penalizing those that remain heavily reliant on cash burn and future projections, according to Abhishek Jain, Head of Research, Arihant Capital Markets.

"Once these companies got listed, investors started to ask when will the company start generating cash and that is not the case prior to going public," said another analyst Atish Matlawala, Sr Fundamental Analyst at SSJ Finance & Securities.

Investment bankers also played a crucial role in IPO pricing as in some cases, their incentives were misaligned. "Their goal is to maximize valuation and raise as much capital as possible and not to ensure long-term stock performance," says Ashutosh Jha.

There are a few exceptions to this largely moody story though. Zomato has tripled investors' wealth from its IPO, backed by showing strong financials to the Street and also setting a strong stage for future growth. Companies like EaseMyTrip, PB Fintech and Netweb Technologies also did well on the Street by taking frugal growth measures.

Going ahead, analysts believe bankers will value these startups more realistically and hence will be able to leave some money on the table for investors.

"Startups must price realistically, not optimistically. A solid, well-received IPO builds long-term trust, while an overhyped one can collapse under its own weight. Most importantly, they need to think beyond IPO as just an exit, and see it as just another phase of growth."

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)