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Business News/ Opinion / Why do Indian start-ups avoid listing?

Why do Indian start-ups avoid listing?

New companies have preferred sheltered existence under venture capital

Illustration: Jayachandran/MintPremium
Illustration: Jayachandran/Mint

The current meltdown of tech stocks in the US might be sending shivers down the spine of many entrepreneurs with planned initial public offerings (IPOs). India’s start-up community needn’t worry since it is at no immediate risk. Unlike their counterparts in the US, Indian entrepreneurs have avoided the vicissitudes of the markets by the simple expedient of sticking to the sheltered existence offered by angels and venture capital. Last year only two new listings, with a combined value of just $5.7 million, were announced in the tech space in India, according to Bloomberg. In the past three years, there have been just two venture-funded technology IPOs of any consequence, Justdial and MakeMyTrip.

With few start-ups willing to risk listing, the Nifty index of 50 companies continues to be dominated by old economy stocks with the triumvirate of Infosys, Wipro and TCS representing the tech sector. Significantly, all three are now 25-30 years old and their business of software services export has little upside. Of the 21 companies that comprise the CNX IT Index on the National Stock Exchange, which represents over 95 % of the free float market capitalization of the stocks forming part of the IT sector, the youngest are companies such as Mindtree, which is nearly 15 years old and Justdial, which is 16 years old.

By contrast, the NYSE TMT (technology, media and telecommunications) index representing 19% by market cap of the investable universe globally has companies such as Juniper Networks, Red Hat, VMware, NetSuite and Fusion-io, all of which are products of the last decade and have listed in this period. The Nasdaq 100, too, abounds with companies of the dotcom vintage.

Part of the reason why Indian start-ups have avoided IPOs may be the hostile market conditions as well as the fact that the Indian ecosystem doesn’t favour newcomers. Market analysts say Indian investors typically look for value in stocks, which doesn’t quite work for the unprofitable, high-risk nature of tech start-ups. But it isn’t as if those that have listed on global exchanges have set the bourses on fire. That’s probably because few of the start-ups have really set about creating a unique value proposition. With acquisition, rather than scaling up being the ultimate objective of most Indian start-ups, they have preferred the quick exit of a sell off to the more rewarding if riskier option of growing organically. Thus, recently Little Eye Labs, a one-year-old Bangalore-based mobile app start-up, sold off to Facebook, presumably because its founders saw little hope of emulating the latter in terms of growth and market impact.

That contrasts sharply with entrepreneurs elsewhere, who are willing to play the high risks game. Helpdesk software maker Zendesk, a seven-year-old company founded in Copenhagen, and funded initially by Charles River Ventures and Benchmark Capital, just filed for a $150 million IPO on the New york Stock Exchange. The company’s competition comes from Indian firms such as Kayako, Tenmiles and SupportBee, none of which appears to be preparing for an IPO. Kayako started out of Jalandhar in December 2001 while Tenmiles is a 14-year-old company based in Chennai.

The IPO process takes the opacity out of a start-up, making its finances as well as its game plan transparent to the open market, which can then determine the value it will place on the company. A successful IPO is an endorsement of a start-up’s business, its margins and growth. It is the Street’s way of saying, we trust this company, and is a signal to retail investors as well as customers and vendors that here’s a company you can do business with.

Exits are anyway the critical component of any entrepreneurial venture, they keep the cycle of venture funding going by providing early funders a definite exit option. Exits are also critical for employees to cash out and look at creating their own ventures. Of the 50 employees at WhatApp, a few early birds will make upwards of a $100 million, which will certainly embolden a handful to set up their own ventures. Steven Kaplan, a teacher of entrepreneurship and finance at the University of Chicago’s Booth School of Business has noted how the IPO process is critical to the economy’s ability to generate wealth and innovation.

The failure to take the start-up journey forward tells a sad story of a drought in frontier innovation in the Indian start-up space. While part of the reason might be the absence of a conducive ecosystem, lack of sufficient ambition among the entrepreneurial community is also certainly a factor.

Should India’s tech start-ups be looking at listing to realize their true value? Tell us at

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Updated: 14 Apr 2014, 05:33 PM IST
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