The Zomato IPO was fully subscribed on day 1, with retail investors leading the frenzy. The Indian startup ecosystem, which started to develop almost a decade ago, is now maturing. Many companies like Zomato, Paytm which made an early entry into space, have gained investors’ as well as customers’ confidence in the last decade and are going for stock market listing.
This year many more startups including Paytm and Mobikwik will go for IPO, and they are generating a lot of buzz among the retail investors as well as institutional investors. If the investors were limited to retail investors, the analysts would have called it sentimental investing but given the fact that almost every mutual fund invested in the company, one can argue that the moment of Indian startups has truly arrived.
The mutual funds (institutional investors) went against the cardinal rule of their investment philosophy – focus on the profits of the company – to invest in Zomato. The losses of Zomato run in hundreds of crores but still, the MFs invested in the company given its market domination and large customer base.
“Startups that are big enough and mature have outgrown the venture capital and private equity funds’ ability to invest,” said Manisha Girotra, country head for Moelis & Co. “These companies which need larger pool of capital to grow are the ones readying to go to the public market.”
Retail investors always lead when it comes to investing in consumer companies because they see these companies as their own. Zomato has crores of subscribers and regular customers in India, and given the personal attachment to these companies, the retail investors are more likely to bet on these companies.
Moreover, with the retail investor revolution in India, thanks to the penetration of smartphones and Aadhar based verification, almost every consumer that orders food on Zomato can invest in the company.
“Given that a number of these companies operate in the consumer segment, retail investors may identify with these companies a lot more,” said Devendra Agrawal, founder of Dexter Capital Ltd. “However, the companies would now be required to report their performance every quarter and will be under pressure to deliver on profitability much sooner.
The best thing is that lot of domestic investors – institutional as well as retail – are showing interest in investing in these companies. The colonization of Indian startups by American and Chinese investors had become a big issue.
Previously Piyush Goyal said that India Inc. has the responsibility to ensure that Indian startups do not sell out cheap to International investors and, therefore, they should allocate a part of their wealth to fund startups. “I appeal to our Indian businesspersons to dedicate a part of their wealth to this cause, say a 10,000 crore rupees fund which is professionally run and managed with no role of government. Even if 1% of your valuation is pooled in a domestic fund, we will not sell out cheap to international funds,” Goyal said at Resurgence TiEcon Delhi – NCR, a four-day virtual event.
The government has now become cognizant of the issue of colonization and is trying to address the issue. A few weeks ago, the Modi government unveiled a 10,000 crore rupees fund for domestic firms but the government alone is obviously not enough.
The Indian startup ecosystem is the third-largest in the world with more than 40,000 companies and around 40 unicorns. Therefore, the startups need a huge amount of capital, which cannot be met without the entry of private players. And the great interest of Indian investors in Zomato’s IPO gives a hope that the Indian startups would not need to sell cheap to foreign players.