Flipkart's IPO: Success Plan or Death Wish?
Flipkart gears up to get listed in 2021. Why is this IPO crucial? Read on
Have you ever wondered why Indian tech-startups are rarely listed on stock exchanges?
Why would you? After all, these startups have managed to get fundings at eye-popping valuations from Venture Capitalists. Why would they even want to go to the public to raise money?
Seeking money from the public at large implies opening up to public scrutiny. It forces them to focus on short-term goals of profitability and they can say goodbye to their dreams of expansion and super-fast growth. Which is honestly so meh!
Just look at VCs. They are so optimistic about everything. They find the startups to be so worthy, unlike the grudging investors of the stock market, who demand good returns for their investments and seem to have no appetite for risk.
Move fast and break things? Naah! The cautious stock market investor will break your head even if you suggest this!
So, thanks. Startups should not get listed. Let the young breed of millennials be!
All is fine, except, one day we have to get out of La La Land. And that one day is finally approaching. Sooner, than later.
The VCs are no genie (well startups are no magic lamps either) and they cannot keep pumping funds into the startups forever. They were patient for a while, but at the end of the day, they invested to get value in return.
But, the million dollar question is- If the startup doesn’t get profitable, how will the VCs and the early investors make money?
And the billion dollar reply is- Initial Public Offering (IPO)
Umm…How?
Read on.
If all the whisperings and murmurings are to be believed, Flipkart will come out with an IPO in 2021. Walmart, its parent company is planning to raise US$10 bn at a valuation of US$40-50 bn.
But, what value did Walmart ascribe to the company when it acquired Flipkart in 2018?
US$21 bn. It was Walmart’s biggest ever acquisition and also the biggest deal in the e-commerce world.
Well yes, your math is right!
Walmart plans to pocket almost double the price it paid to acquire Flipkart! But funnily, even their acquisition was made at double the going valuation of the company in 2018.
Is the valuation justified? Will the loss-making company turnaround its conditions and become so profitable in the future? All we have is Walmart’s faith. A faith steered by its own claims.
And it is not the first time that investors have been faced by such a tricky situation. A situation where they witness valuations by the people who themselves have stakes in the company and are looking to off-load.
In 2019, WeWork came out with an IPO proposal. One move, that changed the fate of the company overnight. One move, that spelled doom for the company and its VC fund, Softbank.
This is how the whole debacle unfolded.
When WeWork filed its papers to go public in June 2019, it was valued at US$47 bn. Instinctively, it sounds too high, right? Banker Goldman Sachs felt it was low. They reportedly felt that the value could be US$96 bn.
But, WeWork’s dirty laundry was out in the public when the financials reported massive losses. And losses were just the tip of the iceberg.
Then how did the bankers and VC funds justify the valuation?
By building financial models that can be demonstrated to work (Read: wishful thinking). That’s the thing about numbers, those who understand them can make them dance to their tunes.
But it looks like they went too far with WeWork. The public was not going to be tricked into their far-fetched ambitions so easily. The current situation of the company and its futuristic valuations did not concur at all and the company had to keep cutting down its valuations and pushing its plan of IPO. Eventually, that plan was stalled indefinitely.
In October 2019, WeWork ran out of cash and was offered a bailout by Softbank at a valuation of approx. US$8 bn. And it did not stop there. It fell further down to US$2.9 bn. A mighty fall from grace. US$47 bn to US$2.9 bn.
Valuing a company based on future prospects is not unreasonable. But at the same time, it is important to be grounded in reality. It is a ticking bomb. You cannot get away with unrealistic valuations. Sooner or later, the bomb will go off.
But, unrealistic valuations are not the only reason why startups don't list in India (heck, how many of us even know how to calculate the true value of a company?). The Indian regulatory norms is a much bigger headache (and deserves a separate article).
Even Flipkart is not going to be listed in India. US stock exchange it is. Nevertheless, it is going to be a litmus test for a big Indian startup. Will it be able to justify its valuation or will it go the WeWork way?
By Yavantika Malani
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