May 31, 2023

Backing Loss-Making Firms In The Knowledge-Based Economy

By Ashwini Agarwal
First publised on 2021-11-12 08:33:49

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Nykaa's stellar debut on the bourses - the share listed at a huge premium and quickly scaled to double its issue price - made its founder Falguni Nayar a billionaire. But that was not the only thing it achieved. It reinforced the emerging belief that the Indian startup ecosystem is headed for greater heights, backed by investors who are willing to take the long term view and put their money behind entrepreneurs who they think are positive disrupters and will make a difference.

There was a time when investors would not touch a loss-making company (with no break-even in sight, let alone profitability) with a bargepole. But with savvy fund managers willing to pour money in these startups by betting on the future, the retail investors have also changed their stance. This is evident from the way they have backed the recent IPOs of loss-making firms like Zomato, Nykaa, Policybazaar and Paytm, despite their huge valuations and supposedly exorbitant issue price. Most analysts have agreed that such huge valuations for these firms are not sustainable and the share price is likely to go down hugely. But the share price of both Zomato and Nykaa has not gone down after their listing, proving that retail investors were not guided just by the premium in the grey market at the time of the IPO.

India has seen 35 unicorns (firms with a valuation above $1bn) this year. Funds have poured in more than $32bn in startups in India till September this year. This proves that money will never be a constraint for new ideas and innovation. The government now needs to ensure that the regulatory environment is conducive to the nourishing of startup activity. Although a lot has been done to free startups from stifling red tape, the enormous amount of money now being attracted by these firms should not make them targets for tax and other regulatory authorities. This can only be prevented if clear laws and transparent rules are drawn up to help the onward march of these firms that expand India's knowledge-based economy.