When you hear phrases like, “The sky is not falling” and “India is in a very good space” from the best in the business, who also tried to crack the “fundraising question” for early-stage startups, you can sense that optimism has taken the centre stage, and it has been contagious.
As was evident at the two trailblazing discussions, featuring 10 of the most brilliant, innovative minds from across the industry and two moderators from the Economic Times trying to get the most profound insights from them at the ET Soonicorns Summit 2024, held on September 20 in Bengaluru.
The shifts in VC sentiments
The first of the two panel discussions was, ‘Surge in Investor Interest: Vision and Outlook of the Indian VC Ecosystem Beyond Hype and Uncertainty,’ featuring Prayank Swaroop, Partner at Accel; Amit Somani, Managing Partner, Prime Ventures; Anand Datta, Partner, Nexus Venture Partners; Ritesh Banglani, Partner, Stellaris Venture Partners; Kanika Mayar, Partner, Vertex Ventures; and Vinod Nair, Co-Founder, Enzen Group and Mirai Ventures. Manu P Toms, Senior Editor, Economic Times moderated the session.
The panellists argued that the Indian startup ecosystem is maturing, with a positive rub-off effect on the broader economy, an improved quality of the talent pool, an emergence of repeat and younger founders, an increased global interest in Indian startups, India’s ability to absorb global capital, and other equally important factors.
“It is a moment to shine. Besides all other factors, domestic capital has come into the markets, shaping a lot of things in a progressive manner,” said Prayank Swaroop. “The shift from relying heavily on US investors to domestic capital now fuelling startups marks a significant change in how venture capital operates in the country,” Swaroop elucidated.
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The sky is not falling, but funding challenges persist
The panellists said that increased liquidity from IPOs and public markets, reduced risk aversion among entrepreneurs, growth in VC funding, long-term optimism, and the emergence of deep tech and consumer brands are the key pivots that have anchored the Indian startup ecosystem’s resurgence.
“Entrepreneurs have realised that the sky isn’t falling. Early-stage funding is available, and if they have a good idea, all of us are ready to fund them,” said Ritesh Banglani, adding that while late-stage funding has not fully recovered, early-stage funding is readily available.
Banglani asserted that the Indian economy is strong, inflation is controlled, and the stock market is performing well. “This stability has fuelled ambitions, and has encouraged entrepreneurial ventures as founders feel more confident to pursue newer ideas,” Banglani surmised.
Further cementing Banglani’s observation of late-stage funding, Anand Datta added that the market has not fully bounced back, and concerns remain about Series B and C stage funding.
“While early stage funding has resumed, there are still challenges for startups in the Series B and C stages as investors remain cautious of these rounds. This gap in funding is one of the nuances that distinguishes the current recovery phase,” Datta explained.
Datta, however, noted that despite this caution, the Indian startup ecosystem is growing at a fast pace, largely driven by the digital-first economy. “The rapid adoption of UPI and the evolution of digital payments infrastructure exemplifies this shift. It is evident that a lot of capital will be drawn to this ecosystem,” he elaborated.
The importance of IPOs
“VCs are super excited about IPOs,” Amit Somani told the gathering.
He said that one of the most important trends driving optimism in the Indian startup ecosystem is the increasing focus on exits, particularly through IPOs.
“VCs are now more focused on ensuring their investments can yield sustainable returns through public listings, which has become a more feasible and attractive path for startups,” Somani said. “The excitement is not necessarily for the valuations, but also for the visibility and the realisation of returns.”
The road to IPO, a step-wise guide
Throughout the ‘Surge in Investor Interest’ panel at the ET Soonicorns Summit 2024, the excitement of VCs vis-à-vis the IPOs was quite palpable
Having highlighted the importance of IPOs, there are challenges stacked up in the path towards going public. How do startups navigate those challenges?
What are the key forward-looking approaches when a startup founder considers raising an IPO?
The all-important Soonicorns Special panel titled, ‘How to Raise Money: We’ll Tell you at the Soonicorns,’ addressed these questions as experts, including Sanjay Khan Nagra, Khaitan & Co; Amit Ramani, CMD, Awfis Space Solutions; and Neeraj Tyagi, Co-founder & CEO, We Founder Circle and Partner, Avinya VC, broke down the most pertinent challenge of scaling a startup from Series A to Pre-IPO, one step at a time. Pratik Bhakta, Deputy Editor, Times Internet moderated the session.
While everyone acknowledges the importance of fundraising, for the first time an initiative was taken to decode and dissect the questions that every startup founder is up against. The speakers painstakingly dived deep into every aspect of the fundraising question, starting with the “clarity on why a company wants to go public?”
The panellists believed that going public was a significant decision for any company, and the motivation to do so need to be clearly understood before taking the next step, given the fact that there are companies who do extremely well in the private domain.
“You need to be extremely clear on why you want to go public. It is not just about accessing public market capital, but it is also about aligning with the company’s stage of growth and investors’ expectations,” Amit Ramani asserted.
Ramani believes that one of the reasons for going public can be to provide a safe exit to the institutional investor. “When you are taking money from institutional investors, they need an exit. And the primary way to get somebody an exit is an IPO or a strategic sale,” Ramani explained.
Taking the discussion to the next level, the panellists provided a step-wise guide for founders to go public.
- Self-belief: The experts advocated that there should be a strong belief, not only in the founders but investors as well, that the company is able enough to succeed in the public markets. This conviction, they maintained, is the foundation for the decision to move forward with an IPO.
- Timing and readiness: There must be an evaluation of whether the company meets the criteria for going public. “For example, we were hitting the right scale, hitting $100 million in revenue and approaching profitability. It was the right time,” Ramani said.
- Positioning as a market leader: Being a market leader is an added advantage. Ramani’s company was the first co-working company in the world to successfully go public. They are the largest co-working company in India. That obviously gave them an edge in going public.
- Profitability or a clear path to profitability: A key prerequisite to going public is having achieved profitability or at least having a clear path to profitability.
- Revenue scale, a critical benchmark for IPO: A key benchmark for going public is also reaching a certain scale in revenue, the panellists feel, which is often around $100 million ARR (Annual Revenue Recurring). They said that companies approaching this level with profitability become serious candidates for an IPO.
- Planning for all possibilities: Yes, there is a sense of excitement, the panellists said, but founders and investors should exercise cautious optimism and plan for various outcomes, including positive as well as negative —given the unpredictability of the IPO process. “Having a backup plan for M&A (Mergers & Acquisitions) is the right thing to do,” Sanjay Khan stressed.
- Preparations for going public: While building the necessary scale and profitability are critical factors such as legal structure, compliance, and governance are equally important.
- A tailored approach: Every business model is different and requires different preparations while going public. “For example, Hesa, a rural e-commerce business, faces challenges around cash flow, while BluSmart, an asset-heavy EV ride hailing business, is focused on sustainability. Companies must address their specific operational challenges to make their IPO viable,” Neeraj Tyagi said.
- Long-term planning: The panellists feel that preparations should begin at the early-stage, with founders planning their IPO journey at the very beginning. It is crucial to foster an environment of collective learning and mentorship, they asserted, and draw from the experiences of those who have already navigated the process.
- Founder sensitisation: Respecting money, others’ money, is the key, the panellists maintained. Founders should be mindful of investors’ expectations.
IPO calls for a reorientation in outlook
One of the most critical things to tackle with post-IPO can be the transformation of a founder’s role, the panellists believe, given that there is a dramatic change in the role of a founder.
Ramani said that the role of the founder changes from managing a private company with more flexibility to running a publicly traded company where quarterly performance is closely monitored by shareholders. “The pace of work increases, and the focus shifts towards short-term financial results,” Ramani explained.
The panellists listed other important things to be prudent about as well:
- The shift in management focus: As companies near an IPO, the focus significantly shifts towards preparation of the listing. Handling regulatory requirements, and ensuring the company is ready for quarterly reporting and investor scrutiny. “Careful planning and an enhanced ability to manage internal operations as well as external expectations are the key,” Khan said.
- The regulatory shift: The transition from a private to a public company will lead to stringent regulatory impositions by the Securities and Exchange Board of India (SEBI), the panellists said. The regulations are fundamentally different from those in the private domain and one needs to be cautious while navigating the regulatory requirements.
However, amidst all the preparations and remaining agile to navigate the transformations that an IPO brings with it, the paramount question remains: What makes going public a better choice?
The panellists pointed out a favourable environment. Policy changes, for instance. The easing of the “angel tax” they felt has helped investor confidence in India to a great deal. The positive developments are further encouraging foreign and domestic funds to focus on Indian markets for investments and IPOs, the panellists believed.
With investor engagement shifting to India, the panellists noted that international growth-stage investors, who once conducted roadshows in countries like Singapore and the US, are now actively engaging with Indian companies.
This shift, the panellists believe, is attracting the investors to India and directly engaging with potential portfolio companies.
The ET Soonicorns Summit 2024 is powered by Phoenix Kessaku. Upskilling Partner: UpGrad Enterprise; Insurance Partner: PolicyBazaar for Business; Banking Partner: Bank of India. Gifting Partners: IGP.com; The Mind and Company, Plum, Clay Capital.
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