India’s startup ecosystem has witnessed a dramatic rise in unicorns—companies valued at over $1 billion—over the last decade. However, many of these high-valued startups remain loss-making yet continue to pursue Initial Public Offerings (IPOs). This phenomenon has sparked debates about the financial sustainability of such companies, their impact on the economy, and the viability of retail investments in the public markets.
Today lets take a look at the paradox of loss-making unicorns heading for IPOs, and explore reported news, and examine how startups, investors, and IPOs influence the larger economic picture.
The loss-making unicorn landscape in India
A staggering 74% of India’s 74 unicorns in 2022 reported cumulative operating losses of $5.9 billion, according to Inc42. Notable examples include VerSe Innovation (parent of Dailyhunt and Josh), ShareChat, Unacademy, and Udaan. These losses highlight the high cash burn model adopted by startups aiming to expand rapidly in highly competitive markets.
The story continues into 2024. A report by Financial Express reveals that more than half of the Indian startups preparing for IPOs remain unprofitable. Companies like Swiggy, Ola Electric, FirstCry, MobiKwik, Portea Medical, Awfis, and PayMate are among those vying to go public while still grappling with significant operational losses.
For instance, Swiggy’s food delivery business struggles with razor-thin margins, even as it diversifies into grocery delivery and other verticals. Similarly, Ola Electric, despite its ambitious plans to dominate the EV sector, has yet to achieve consistent profitability.
The precedent: Zomato’s landmark IPO
Zomato became the first major Indian tech startup to go public in July 2021. Despite its lack of profitability, the IPO was a resounding success, raising over ₹9,375 crore (approximately $1.25 billion) and listing at a significant premium. This success opened the floodgates for other loss-making startups to consider public offerings.
The Securities and Exchange Board of India (SEBI) subsequently relaxed norms to allow unprofitable startups to list, provided they demonstrate growth potential and a solid business model. However, Zomato’s post-IPO performance was volatile, reflecting the challenges of sustaining investor confidence in loss-making enterprises.
Why are loss-making Unicorns pursuing IPOs?
The pursuit of IPOs by loss-making companies can be attributed to several strategic and economic factors:
Access to Capital
IPOs provide startups with substantial funds to scale operations, invest in new technology, and expand into untapped markets. For capital-intensive industries like food delivery, electric vehicles, or healthcare, public offerings can bridge funding gaps left by venture capital.
Investor exit opportunities
IPOs serve as a lucrative exit route for early-stage investors, allowing them to liquidate their stakes and realize returns. This is especially attractive in markets like India, where private funding cycles may take longer to mature.
Brand Credibility and Visibility
A successful IPO enhances the company’s brand value and market visibility, attracting customers, partners, and new investors. Companies like Zomato, Nykaa, and Paytm gained significant consumer trust post-listing.
Regulatory Incentives
SEBI’s relaxed guidelines have enabled loss-making startups to list as long as they can demonstrate growth potential. These regulatory changes are part of broader efforts to deepen India’s capital markets and attract tech giants.
Impact on the economy
Startups are engines of innovation, often introducing disruptive technologies and services that boost productivity. Unicorns like Swiggy and Ola Electric have created thousands of jobs, supported ancillary industries, and stimulated consumer spending.
The listing of startups in public markets diversifies investment opportunities for retail investors, fostering a culture of equity participation. India’s capital markets benefit from increased liquidity and global attention when high-profile IPOs take place.
However, the trend also poses risks. Retail investors often lack the expertise to assess the viability of loss-making startups. Without clear paths to profitability, investing in such companies becomes speculative and potentially risky.
Implications of loss-making IPOs
The performance of companies like Zomato, Paytm, and Nykaa post-IPO illustrates the challenges of sustaining investor confidence. Paytm, for example, faced a sharp decline in valuation after its IPO, raising questions about inflated startup valuations.
Loss-making IPOs highlight structural inefficiencies in India’s startup ecosystem, including over-dependence on venture capital and limited focus on unit economics. Addressing these issues is critical to ensuring sustainable growth.
Critics argue that many Indian startups are overvalued, driven by aggressive funding rounds rather than solid fundamentals. High valuations create pressure to deliver rapid growth, often at the expense of profitability.
The volatility in the performance of newly listed startups has led to losses for retail investors, raising concerns about the fairness of allowing unprofitable companies to list.
Startups heading for IPOs often face scrutiny regarding governance and financial disclosures. Transparent reporting practices are crucial to building trust among investors.
Several studies have examined the phenomenon of loss-making unicorn IPOs. Research by McKinsey highlights the importance of sustainable unit economics and long-term profitability for startups seeking public listings. Additionally, reports by Inc42 and Economic Times underline the need for regulatory oversight to protect retail investors.
What do we think about it
The trend of loss-making unicorns heading for IPOs reflects the dynamism and challenges of India’s startup ecosystem. While such listings can democratize wealth creation, foster innovation, and strengthen capital markets, they also pose risks to retail investors and highlight structural inefficiencies.
For startups, a clear path to profitability, robust governance, and transparent communication with investors are critical for long-term success. Policymakers and regulators must strike a balance between fostering innovation and protecting investor interests to ensure sustainable growth.
By understanding the dynamics of unicorn IPOs, investors and stakeholders can make informed decisions that contribute to the broader economic narrative. India’s startups, despite their current challenges, remain a vital driver of the nation’s ambition to become a global tech hub.
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