Stockmarket. A large bite

The strong response to the Initial Public Offer (IPO) from Zomato, India’s first unicorn to seek listing on the main board, offers cause for both cheer and concern in equal measure. On the positive side, the over-subscription busts the myth that Indian investors, even domestic institutions, lack the risk appetite needed to bet on new-age technology businesses that rely on cash burn to acquire a critical mass of customers. That the anchor portion of this IPO drew 186 institutions including sovereign wealth funds, global mutual funds and pension funds and saw a heavily subscribed QIB (qualified institutional buyer) book, suggest that SEBI’s higher regulatory bar for loss-making companies, which require them to carve out 75 per cent of their IPO book for QIBs, is not a real deterrent to promising candidates. Zomato’s success appears to have emboldened other start-ups such as Mobikwik, Paytm, Nykaa and Policybazaar to dust off their IPO plans. If this results in profitable private equity exits, the Indian start-up ecosystem can receive a significant mood lift.

But the Zomato frenzy is not without its flip side. Even by global e-commerce standards, Zomato’s valuation is steep at 29 times sales for a cash-guzzling business with no clear runway to profitability in the foreseeable future. The rapid scalability and network effects for which global tech names such as Amazon command premium valuations are not a given in Zomato’s case, as it lacks a well-defined moat, relies on the fairly simple proposition of food delivery and has a strong competitor in Swiggy. The narrative around India’s billion-strong consumer market meriting such valuations has also been wearing thin of late, with the discovery that low per capita incomes and limited digital penetration set very finite limits on the market opportunity for players such as Zomato.

It is difficult to say if investors who bid in this IPO really have the private-equity mindset required to take on this high-risk bet, or are simply carried away by brand visibility and the prospect of listing gains. The brisk market in short-term IPO funding and the rash of demat account openings suggest newbie investors being swept up in the frenzy. Likewise, it may not be correct to assume that all the institutional investors are in this for the long haul. In the past, institutions have proved to be as fallible as retail investors in high profile IPOs. In sum, Zomato’s big success in its book-building is a definite win for the start-up ecosystem but it is important that investors win as well. If they don’t, other start-ups aspiring to list may find the going tough.

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