David(s) becoming Goliath(s)
In startup ecosystem, people often say (but rarely follow) that fundraising events should not be given significance or coverage as they are given. Going by that logic, ideally, company going public should not also be celebrated. Technically, it is another fundraising event albeit with a difference. Okay, even I am spitting at myself for what I just wrote.
For any startup, anywhere in the world, going public is a big deal, a very big deal. Especially for a B2C tech startup in India serving Indian customers. It is a testimony that exits via IPO are not an exception, not a rare phenomena, neither a factor of luck, nor the function of strategy/corporate development team of a bigger multinational calling the shots and deciding the future of a startup. Simply put, all the news of slew of Indian tech startups planning for IPOs for real is a super special moment of pride and cause for great celebration. Even if you are a distant spectator or observer of the Indian startup ecosystem.
Like all other exits, these IPOs will drive the sentiment and confidence of VCs in a positive trajectory. Employees might potentially become angel investors. With the glut of money, confidence, inspiration and experience, potentially, new startups, new mafias, new jobs, wealth and value might be created. The perpetual cycle will be sustained.
However, if you are a retail investor, it is a different tale. It wouldn't hurt to remember/remind some basic fundamentals.
- Private market valuations are way different from public market valuations. For e.g in Aug 2018, Uber was valued at $76 B, however when they went public in May 2019, it was valued at $75 B. Much less than $100 B valuation they were hoping for!
- Market caps or the size of the IPO really doesn't mean anything. Nope, this is not as absurd as what I wrote in the opening para. In fact, it is not at all absurd. In march 2000, at the height of dot com boom, the market cap of Cisco was more than $500 B. Cisco never went back to those glory days. After 20 years, it is half of their peak glory days. At the least they are around, alive and kicking.
- Pops around IPOs are not guaranteed. In fact, higher the pops/surge of price around the first day probably means the bankers mispriced and left money on the table. Facebook closed the day at a share price of $38.23, only $0.23 above the IPO price and down $3.82 from the opening bell value.
- Rapid rise or even fall in the price of stocks for few months after IPO (or even in general ) also doesn't mean anything. The same Facebook stock languished for months, (Wall Street Journal called the IPO a fiasco) going all the way until $18 (in September 2012) and took 16 months to bounce back to the original IPO price of $38! Currently it is trading at $349! In terms of generic case of stock price seeing a rapid surge, Would you invest or gamble in a Game Stop Stonk?
领英推è
One might ask, US tech stories are fine, how should we look at the current Indian Tech IPOs? As a startup ecosystem participant, I am cheering, celebrating, thumping my chest, but as a retail investor, I am not very confident. Most of the Indian startups are still making losses (one could argue Uber too is making losses), path to profitability is not very clear, even their unit economics seems to be on shaky grounds, reading the red herring prospectus sounds either like a thriller or a very scary movie. In fact, when it comes to one big behemoth, I still wonder, do they even know the nature of their business they are in! I can't help but be reminded of the dot com boom and bust of 2000s.
All I am hoping and praying is my skepticism as retail investor would be proven wrong. (I wouldn't mind being the Michael Dell and be very glad if all these companies become a trillion dollar companies like Apple) I really do wish, in the long run, all these companies would live up to the hope, hype and expectation of the retail investors like me, and be a true long term, wealth creation machines.
If you haven't read other articles in this series