In its latest Indus Valley report 2024, the VC firm noted that startups which are not seeing a lot of interest from growth investors, or hitting a growth ceiling and ‘feel better to build profitably than burn for growth’ should be exploring IPOs (initial public offerings) on the SME boards of Indian exchanges.
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Blume’s comments come at a time when growth- and late-stage deals have seen a substantial dip as risk investors get wary and matured startups fear valuation down rounds in a bear market.
According to the report, late-stage funding has seen an 82% fall over the last two years, with a mere $5.8 billion being invested in this stage in 2023. Early- to growth-stage rounds (across Series A and B) have also seen a 60% dip in overall corpus ploughed in by venture backers.
Unlike the venture market, while the IPO market has remained buoyant, SME IPOs have consistently outperformed their main board brethren which has attracted investor attention as it provides increased liquidity and exits, according to the Indus Valley Annual report 2024.
SME board IPOs saw a rise from 109 issues in 2022 to 182 issues in 2023. Even the total worth of these issues increased from Rs 19 billion to Rs 47 billion in 2023.
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In contrast, main board IPOs showed an increase from 38 issues in 2022 to 59 issues in 2023. However, the total issue size was much larger and stood at Rs 497.6 billion in 2022 and Rs 589.8 billion in 2023.SMEs that have gone public in FY23 include Baweja Studios, Megatherm Induction, DelaPlex, DocMode Health Technologies, and Lawsikho.
Further, Blume added, the rationale behind supporting SME board for an IPO is that only a quarter (1,046 of 4,522) of listed companies in India trade above the $250 million market (or above Rs 2,000 crore) capitalisation in India.
Further, as the drop in late-stage funding halts minting of newer unicorns – or privately held startups with valuation of $1 billion – startups are looking to go for IPOs early in their journey.
In 2023, while India saw only two unicorns through non-banking finance company InCred and quick-commerce startup Zepto, it saw eight startup IPOs through baby and personal care brand Mamaearth, online travel company Yatra, drone maker Ideaforge, Indian pharma giant Mankind Pharma, and fintech startup Zaggle.
VC’s lacklustre exits
Over the past years, risk investors in India have been pressed by their limited partners over exits. According to the Blume report, Indian private equity funds continued to outshine their venture capital counterparts in terms of exits year-on-year.
For instance, in 2023 alone, private equity majors invested $11 billion in India, and realised a substantial $21.9 billion in returns (on previous investments). However, venture backers poured in almost $7.5 billion across multiple startups the same year and yielded only $3.5 billion in returns from previous investments.
To be sure, ecommerce major Flipkart still drove more than half of that exit value as Tiger Global and Accel India sold their entire stake to Walmart for $1.8 billion.
With the fall in funding, employee stock ownership plan (ESOP) buybacks by Indian startups have also fallen. Only 16 startups announced ESOP buybacks in 2023, as compared to 42 in 2022.
Further, the value of ESOP buybacks fell from $440 million in 2021 to $200 million in 2022, and $112 million in 2023. The total worth of ESOP buybacks stood at $812 million in 2023, with Flipkart accounting for $700 million.