Hedge funds give startups luxury to delay IPO plan

MUMBAI: Hedge funds, which typically have investment horizons of days or weeks rather than months or years, have been making a beeline to invest in Indian startups but that does not mean public share sales in the form of IPOs are imminent, according to bankers and observers of the entrepreneurship scene.

Instead, what is happening is that deep-pocketed funds are allowing the smaller early investors and some employees to sell a portion of their holdings, in effect playing the role of a public market and pushing back companies' IPO plans.

"It's a necessary step in the evolution of ecosystem to have capital come in at these levels to help companies grow, which used to happen in public markets earlier," said Sandeep Murthy, co-founder of Lightbox Ventures, a fund which was set up this year and is an investor in refurbished goods retailer Greendust.

This move to remain private for longer is in keeping with global trends for top technology companies like taxi hailing app Uber and smartphone maker Xiaomi, which have stayed private even after seeing their valuations soar beyond $40 billion.

Flipkart, which announced raising $700 million (Rs 4,300 crore) last week, pointedly referred to this in a statement saying that its new status as a public company in Singapore — after adding five new funds to its roster of investors—is in no way indicative that an IPO is around the corner.
Flipkart now has an investor each in common with Uber and Xiaomi– Qatar Investment Authority has backed Uber while DST Global is an investor is Xiaomi. Even mutual funds have entered the fray — T Rowe Price is among the most recent backers of Flipkart while Blackrock has bought a stake in rival Snapdeal.

"I don't think the entry of these investors will accelerate exit or IPO timelines," said Aashish Bhinde, executive director at investment bank Avendus Capital which has advised consumer internet companies Quikr, Housing and TaxiForSure in their fundraising. "Firstly these investors will not be large enough shareholders to influence those outcomes and (they) have a track record of taking positions in private companies and holding on to them for 4-5 years."

With over 50 shareholders including cofounders Sachin Bansal and Binny Bansal, Flipkart has become an unlisted public company in Singapore to stay in step with the city state's regulations. US-based Tiger Global is one of the early backers of Flipkart and its largest shareholder. Experts are of the view that as private markets globally accumulate enough capital – this year alone Flipkart has raised upto $1.9 billion- to support the growth needs of fastgrowing ventures, IPOs are no longer viewed as necessary events to finance growth.

"The public markets are not as attractive to emerging high growth companies as they used to be. (IPOs) have now been relegated to liquidity paths for the most part," wrote Fred Wilson, a venture capital investor best known for his early bets on Twitter and Kickstarter, in a blog post in June.

The addition of British investment bank Baillie Gifford, hedge funds like Greenoaks Capital, Steadview Capital to Flipkart's list of shareholders underlines the growing appetite for India's online retail market, estimated to be worth $23 billion by 2019.

What these mature investors are doing by enabling exits without IPOs is plugging a weak link in India's booming startup space.