Should We Allow IPOs of Loss Making Startups?

  

A slew of Initial Public Offers (IPO) are up round the corner. Zomato’s IPO has just ended today, while Paytm is next. Thereafter, MobiKwik’s IPO will come this year. These are all Tech Startups.

What is common between most Startups? They all make losses year after year. Their business model is based on "cash burning" to gain new customers, in order to increase valuation. These companies have survived only by getting new VC money every now and then. As soon as such companies stop getting new VC money, they wind up pretty fast. Remember 'Taxi For Sure' which closed down as it could not get new round of VC fund? It is the same story for most of the startups.

Some more data to support my point:

1. Food delivery app Zomato’s standalone losses widened 160% to Rs 2,451 crore in the fiscal year ended March 31, 2020, regulatory filings sourced by business intelligence platform Tofler showed. (Source: ET)
2. One97 Communications Ltd, which is the parent company of Paytm, posted a net loss of ₹2,833.18 crore in the year ended March 31, 2020, according to data sources from Tofler. (Source: HBL)
3. Mobikwik's total loss for the year jumped up to INR 110.9 Cr from INR 99.1 Cr last year, on the back of an over 20% decline in revenue. (Source: Inc42)
4. Ola, which is preparing for an IPO in 2 years, saw its total losses decline by around 8.8 %, amounting to Rs 2,593 crore in FY19. (Source: Entrackr)

All these companies make losses.

I wonder why India’s market regulator SEBI has given permission to such volatile startups to ‘loot’ common investors.

Look at how online shopping tech startup Infibeam coned investors. Stock listed at 77 and within a year, it reached level of 16! All small investors destroyed (small retail investors are known to panic and sell; unlike big or institutional investors who have got deep pockets). 

Until such IPOs are burning VC money, no one cared. No one cared even though these Startups did not have any sort of transparency about their shareholding patterns or other aspects of business. This had become a point of contention during "Boycott Chinese Products" phase. After getting listed, such Startups are bound to become more transparent. But their business model is not likely to change! 

With their cash burning business models and sell-all-and-fly attitude of their owners, why should SEBI allow such IPOs? I think these are even worse than Chitfunds because these are tech companies and people trust them because of their trust in technology companies! 

We can also doubt the "timing" of these IPOs. It seems that right after pandemic, when economy is in stress and no company is sure about its future, foreign VC bigwigs want to cash out of their investments in these startups. And India's market regulator is allowing them this golden opportunity which perhaps is an indication of what all is wrong in our financial market. 

In my opinion, market regulator SEBI should not allow IPO of such startups which make losses year after year, whose business models are based on burning cash to gain new customers, and where large number of foreign VC funds are currently invested. As below ET report suggests, the foreign VC funds will cash out soon after the IPO launches and small time retail investors may have to book all losses.

“Sequoia Capital and Mirae-Naver will get a unique opportunity that no other pre-Initial Public Offering (IPO) investor of Zomato are eligible for – to cash out on the company’s shares if the public offering becomes super success. Normally, all the shares held by pre-IPO investors are subject to 1 year lock-in period. However, there is a special exemption from this rule provided to Foreign Venture Capital Investors (FVCI).” (Source: ET)

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