After a quiet period, startup IPOs are surging again in 2024. However, investors should be cautious and consider factors beyond market exuberance to avoid potential pitfalls.
New Delhi: After a lull in 2022 and 2023, startup initial public offerings (IPOs) are back with a bang this year. Ten new-age companies have made their stock market debuts in 2024 so far, including prominent players like Go Digit, Awfis, ixigo, FirstCry, and Ola Electric. This resurgence contrasts with just three startup listings in 2022 and five in 2023. The IPO market has been revitalized with new-age startups opting for public listings.
Several factors contribute to this trend. A shift in focus among startups from merely chasing growth to pursuing profitability and positive unit economics has improved investor confidence. Conducive market conditions and a raging bull market are also significant drivers, as new-age companies seek to capitalize on high valuations.
India is witnessing a mindset shift as increased domestic liquidity fuels investments in capital markets. The substantial rise in demat accounts, which crossed 124 million by Q1 2024, indicates a growing interest in equities. With capital markets at historic highs, startup IPOs are seen as exciting opportunities in companies that could represent the new way of doing business.
The Street’s enthusiasm is evident in the blockbuster listings of these players. The IPO of e-commerce SaaS platform Unicommerce was oversubscribed a whopping 168 times, while that of co-working space provider Awfis saw oversubscription of more than 100 times. Even a mega issue like Ola Electric, which raised ₹6,145 crore, sailed through with oversubscription of 4.4 times.
Small and medium-sized enterprises (SME) IPOs also saw exuberant numbers, with cybersecurity startup TAC Infosec’s ₹30-crore IPO oversubscribed 422 times and men’s grooming brand Menhood garnering bids for 200 times the shares it put on offer.
Startup shares have maintained their momentum post-listing. Of the 10 best-performing mainboard IPOs of this year so far, three belong to new-age companies—Awfis, TBO Tek, and Unicommerce—all of which have soared about 100% within just three months. TAC Infosec has delivered an astounding 640% returns—the fourth-best performer among all SME debuts in 2024 so far.
Liquidity is a major force driving markets higher. The number of unique mutual fund investors has swelled from 22 million in March 2020 to 47 million as of June 2024. Similarly, the number of unique demat account holders has ballooned from 36 million as of March 2020 to nearly 100 million now.
This surge in liquidity can lead to asset price inflation rather than capital formation. A prolonged mismatch between demand and supply can result in higher prices, and suppliers' rush to meet market demand can lead to compromises on quality. Startup investing is difficult even for seasoned investors who look beyond pure financials.
It is feared that with the euphoria around this space, and the hunt for immediate alpha and the liquidity, the likelihood of these being bubbles cannot be ruled out.
Another factor often overlooked by equity investors is that most shares are under a lock-in period during the first few months. For company promoters, 20% of the post-issue paid-up capital must be locked in for 18 months, while any allotment exceeding this 20% threshold is subject to a lock-in period of six months. The lock-in period for non-promoters ends after six months. For companies with such a low free float, even modest inflows can lead to stock prices moving up very quickly.
From an equity market perspective, the true test of such companies is when the lock-in shares are released in the market. The report card of the startups listed over the past two years makes for a sobering read. Investors must take a more nuanced view when interpreting the price signals. Just because a startup is seeing a surge in its stock price, it doesn’t mean it will turn out to be the “next Amazon” or the “next Tesla”. Even the most promising startup will have to beat incredible odds to emerge as a market leader.
As an investor, it can be hard to avoid the fear of missing out (FOMO). But an over-heated environment is precisely the time you should have your ‘bullshit antennae’ on high alert. IPO oversubscription of 100 times or 200 times should not be taken as a ringing endorsement of the company’s fundamentals. This is because not everyone is playing the same game in the market.
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