The underwhelming response to some of the initial public offers (IPOs) of some of the biggest tech companies has lessons for Indian unicorns that will eventually have to take the public plunge. While WeWork had to pull the plug after its valuation came crashing down by approximately 80% in a matter of weeks, the IPOs of Uber and Lyft earlier in the year have turned out be huge flops, with their shares trading 29.22% and 43.51% below their offer price at the time of writing.
Clearly, private equity (PE) investors perceive these tech giants differently from those on The Street. As Sumit Khanna, a Partner at Deloitte, says, “Either people understand the technology in play or they don’t. That is why, when these companies are held by a close set of PE investors, they have a view [of what the startup] is doing and they value it accordingly.”
The fall right after or during IPO reflects a global trend for tech startups. While on the one hand, the valuations are inflated at the hands of PE investors, retail and institutional investors seem to take a less bullish – or perhaps a more realistic – view after the startup goes public. Says John Maeda, Chief Experience Officer at Publicis Sapient, a digital transformation firm: “The greatest challenge in the investing world is to actively close the distance between understanding a Silicon Valley mindset versus a traditional mindset.”
So what does this mean for India’s bandwagon of non-profitable unicorns like Paytm, Oyo, Swiggy and Ola? An IPO may still be gleam in the eye of their founders, but can the gap between traditional and new-age investors narrow in the next couple of years? Khanna reckons that the stumbles of WeWork and Uber may be because of current market conditions. “The failing IPOs are not just because of the business model or because they are internet companies or tech-based startups. It is also because the market sentiment globally is bearish.”
Maeda adds that the poor appetite for tech IPOs is unlikely to endure. “If you assume that the slight stumble of the two tech darlings [Uber and WeWork] means there are more to come — and patting yourself on the shoulder whilst thinking, ‘Thank goodness I never bothered to take the Internet thing all too seriously,’ — then be prepared to take an even bigger fall in the near future. The computational generation is here, and their time is right now.” That may be sweet music to India’s unicorns.