New-age IPOs: All those 3-letter words decoded

An interesting feature of the IPO rush this time around is the number of consumer focussed tech-driven start-ups that are lining up for going public. While Indian IPO investors have tasted Zomato, public issues of Mobikwik, Paytm, Nykaa, Policybazaar, Ixigo, Delhivery, Flipkart etc. are said to be in the pipeline. While reading offer documents of IPOs, you will come across terms such as GMV, AOV, cash burn, MAU, DAU, CAC, churn etc. As many of these new-fangled IPO-bound firms are yet to make profit, operational metrics are focussed upon. Learning these new terms becomes central to understanding the business model, prospects and multi-billion dollar valuations.

Volume measures

Volumes and transaction size are among the most important dynamics in marketplace businesses. GMV or Gross Merchandise Value is a popular metric used. GMV is the total transaction volume of merchandise transacted through the marketplace in a specific period. GMV can include taxes, fees and services, and gross of all discount. Often the most recent month or the recent quarter’s GMV is annualised. In case of Paytm, FY21 GMV is Rs 4 lakh crore.

GMV is a useful measure of the size of the marketplace. For instance, during Covid-ravaged festival season of October-November 2020, Flipkart and Amazon led the $8.3 billion festive GMV pie, indicating their massive size.

Actual revenues are only a portion of GMVs, for instance, Mobikwik's FY21 GMV was about ₹15,000 crore but revenue from operations is ₹290 crore. Revenue consists of the various fees charged by such a company. In case of Paytm, the revenue from operations is around Rs 2,800 crore, less than 1 per cent of reported GMV. GMV is also referred to Gross Transaction Value, or GTV.

The ticket size in a business matters. Tech-driven start-ups work on volumes. Each time someone places an order, the company gets a certain sum. So, if the company can do an order by spending ₹200 and make ₹210 via fees, then it has positive unit economics.

To understand positive unit economics, you have to look at a metric called Average Order Value (AOV) which is calculated by dividing GMV by the number of orders during a given period. The higher the AOV, the better the chance of breaking-even and clearer is the path to profitability, provided the take rate is not reduced. Take rate is the percentage fee charged by a marketplace on a transaction.

Burn, churn

Cash burn for IPO-bound start-ups is an important metric. Loss-making companies fail when they run out of cash and don’t have enough time left to raise funds. Cash burn is computed by subtracting cash balance at the beginning of the year from cash balance at the end of the year. Start-ups are known to burn high cash amounts by chasing growth. When Google was burning cash in 1999-2001, money was going into building high-tech Internet products. Ditto for Facebook and Amazon in respective periods. However, many Indian start-ups burn cash to sustain businesses. And, now they are getting listed. Hence, investors must be able to identify whether the fund-raise is aimed to just meet expenses..

Once a company with high cash burn is listed on the bourses, it would have to raise money by diluting equity or get merged/acquired by a bigger business. This can impact public shareholders. When they are unlisted, firms can tap venture capital funds etc. to get cash and consequently get valued higher in each funding round to get more cash. But, this is why founders of some hyper-growth firms end up with very small equity ownership. But when they are listed, long periods of cash burn can push the company towards insolvency.

Rhyming with burn, is another important metric called churn. Businesses are successful when they do repeat business. The churn rate is the percentage of existing customers who stop doing business with an organisation over a specific time period. Successful software companies report annual churn rates less than 5-7 per cent. Check for high churn rates in companies.

High churn rates are not good, neither are higher CAC (Customer/Consumer Acquisition Cost). CAC is the cost of winning a customer to purchase a product/service and is expressed in per user terms. For instance, Mobikwik’s new registered user CAC was just ₹11.51 in FY21. Some firms such as Paytm have brought different verticals under one umbrella to lower CAC. Do note that ed-tech firms such as Byju’s may have much higher CAC, which they partially recover when customer buys a course.

Since product and engagement metrics are important for new tech-enabled start-ups, user count is very important. IPO-bound companies will like to wow investors with user engagement and growth. But the focus should be on active users, or even better, monetisable users. For example, Paytm uses a metric called MTU (monthly transacting users), which is defined as unique users with at least one successful transaction in a particular calendar month.

Users are counted as monthly active users (MAU) or daily active users (DAU). Facebook, for instance, defines a daily active user as a registered and logged-in Facebook user who visited Facebook through its website or a mobile device, or used Messenger application, on a given day. Twitter uses Monetisable Daily Active Usage or Users (mDAU) as those who logged in or were otherwise authenticated and accessed Twitter on any given day through twitter.com or Twitter applications that are able to show ads.

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