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Internet IPOs: Is there appetite for loss-making start-ups?

IndiaMART InterMESH's IPO was oversubscribed 36 times and its stock closed 34 per cent higher on the debut day of July 4. This has led to a lot of optimism among the venture capital community and start-ups

Internet IPOs: Is there appetite for loss-making start-ups?

Online marketplace IndiaMART InterMESH Ltd made a strong statement in the stock market. The company's initial public offering (IPO) was oversubscribed 36 times and its stock closed 34 per cent higher on the debut day of July 4.

Expectedly, this has led to a lot of optimism among the venture capital community and start-ups. They see this success as a sign of things to come - many more potential IPOs over the next few years that will open the doors of exit for exit-starved investors.

Venture Intelligence, a company that provides data and analysis on private company financials, analysed if there is indeed any appetite for more such Internet IPOs. The findings are interesting.

IndiaMART is not the first company in India's Internet space to go public; there are quite a few examples.

"The most successful from a stock performance perspective is InfoEdge (IPO in 2006). The shares of two of the other VC-backed Internet companies that IPO-ed this decade - JustDial and Matrimony.com - have not done too well," Venture Intelligence stated in a note.  

"The only pure play e-commerce company to list in India, Infibeam.com, has also disappointed public market investors. Online travel services companies which listed on the Nasdaq, MakeMyTrip (2010 IPO) and Yatra, have also not made money for their public market investors. The 2000-era Indian "dotcoms" which went on to list in the US, Rediff and SIFY, are now unfortunately largely forgotten stocks," the firm added.  

Venture Intelligence mined data from 32 companies that went public (on the NSE/BSE main boards) in the 18 months between January 2018 and June 2019.

"Manufacturing companies (led by auto ancillary, defense equipment and chemicals makers) accounted for 14 IPOs (44 per cent of the total), followed by Financial Services (19 per cent) and Engineering & Construction (13 per cent) companies. Only two IPOs in the last 18 months have been from the IT industry: enterprise software firm Newgen Software Technologies and IT Services company, Xelp. Also noteworthy is the fact that two VC-backed Enterprise Technology companies, E2E Networks and SoftTech Engineers, pulled off IPOs raising less than Rs 25 crore on the SME exchanges in 2018," the firm noted.

Venture Intelligence concluded that domestic IPOs might emerge as a good exit route for VC investors in B2B, software as a service (SaaS) and enterprise technology companies. "Especially, ones that achieve reasonable scale and demonstrate two-three years of profitability. However, it is not clear whether the local market will develop an appetite for loss-making consumer oriented start-ups," it stated.

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