JAIPUR – The US$1.3 billion stock market listing of online food delivery company Zomato on Friday highlighted the galloping emergence of India’s unicorns, or start-up companies with valuations of over US$1 billion.
International investors are warming to India’s increasingly start-up-friendly policies and huge market, particularly after getting their fingers burnt by China’s clampdown on high-tech corporations, not least Beijing’s squeeze on ride-hailing app Didi Global after it recently listed on the New York Stock Exchange.
Zomato’s initial public offering (IPO), India’s first internet unicorn to list, was oversubscribed more than 38 times when it made its Bombay Stock Exchange (BSE) debut, gaining more than 51% on its IPO price of 76 rupees (US$1.02).
The massive oversubscription and high listing price clearly showed the growing interest of entrepreneurs and investors in Indian unicorns, a new buzzword in the country, which has seen rapid and steady growth in recent years.
Zomato’s successful entry into the capital market has encouraged others to follow.
“Around 12-15 of these unicorns are expected to launch IPOs in the next year or so,” said Madhur Singhal, CEO of leading management consultant group Praxis Global Alliance.
Praxis’ research unit, PGA Labs, says India is becoming the world’s third-largest tech startup hub with 47 startups in a report titled “Soonicorns.”
“Halfway through the year, we already have 14 tech startups that entered the coveted unicorn club and there are 35 more expected in the near future,” PGA Labs says.
Most of these are in fintech, software services and e-commerce, and are based mainly in Mumbai, Bengaluru, Delhi and nearby areas.
Big global finance firms such as Tiger Global Management, Sequoia Capital, SoftBank Vision Fund, Accel, Temasek and Falcon Edge Capital have invested heavily in Indian unicorns.
The interest comes as big investors are looking at India’s broad economic potential. More recently, they also look like a hedge on the rising regulatory uncertainty engulfing China’s tech start-ups.
A Bloomberg report echoed similar views in a recent report which said, “Last week marked a watershed for technology startups in India, as a record bout of fundraising shifted attention to the world’s second-most populous market, just as investors were becoming spooked by a crackdown on internet companies in China.”
Indian national government investment-promoting policies, including Prime Minister Narendra Modi’s “Startup India” initiative in 2015, have helped.
The initiative aimed to build a strong eco-system to nurture innovation and startups, drive sustainable economic growth and generate large-scale employment.
In January 2016, Modi unveiled an Action Plan for Startups in areas such as “simplification and handholding”, “funding support and incentives” and “industry-academia partnership and incubation.”
Internet infrastructure has improved dramatically with an estimated 45% penetration, which is expected to grow rapidly mainly due to the increasing use of mobile phones.
Indian entrepreneurs, especially those from Generations X, Y, and Z, have been quietly establishing innovative start-ups with support from national and state governments.
Startups such as e-commerce company Flipkart, digital payment system and fintech company Paytm, supply chain services company Delhivery and others like Policybazaar, Freshworks and Nykaa are all looking to list on the stock market, likely this year.
“Around 14.2 million new individual investors entered the stock markets in 2020-21, the year the economy was ravaged by Covid-19,” said Sandeep Kumar Jain of equity and currency derivatives broker Tradeswift.
“It also comes on the heels of India’s start-up boom, which has seen 11 unicorn businesses emerge in the first four months of 2021 alone. At the moment, India has around 47 unicorns, worth a total of $139.7 billion,” said Jain.
He said that the upcoming rush of new-age consumer internet companies listing on Indian bourses has piqued the interest of a new crop of millennials and particularly Gen Z investors who are more invested in consumer technologies.
Jain notes India has seen a change in consumer buying patterns amid the pandemic, with an ever-growing number comfortable with buying everything from medicines, clothes, gadgets, food and furniture online.
This is one main reason private equity, venture capital and individual investors are piling into India’s start-ups. How long those capital inflows will last, however, is unclear as investors will eventually look for a profitable exit from their investments.
Ajay Data, chairman of Associated Chambers of Commerce and Industry of India (ASSOCHAM) Rajasthan State Development Council and managing director of Data Group of Industries said, “Those investors who believed in new innovative ideas supported these companies while they were in a growth stage.
“Now, IPO serves as an excellent exit platform for these investors and provides an opportunity for retail investors to invest in new business models and hopefully reap the benefits with lesser risk.”
Jain, who has extensive experience in the Indian stock market, said that during the pandemic strong brand and product awareness, as well as increased awareness of stock trading and wealth management, resulted in a new “consumer class” of young investors.
“Young investors, who have recently entered the markets and are building their portfolios, are looking at these consumer internet companies,” he claimed.
“They are getting enticed to invest in these start-ups as they are themselves the consumers of their services and thereby relating themselves to these companies very easily.”
Financial analysts, however, warn about the risks.
“While many individuals are optimistic about listing gains, there is uncertainty about its value because typical stock market valuation metrics do not apply to these new-age thematic start-up stocks,” Jain said.
He says retail investors especially newcomers and young investors should be extremely careful trading in these stocks, which are hard to analyze by their traditional fundamentals.