Once derided, startups have now become stock market darlings

Last week, media startup The Arc noted that India’s new-economy companies crossed an interesting milestone in public markets — their combined market capitalisation surpassed $100bn.Sure, it is just a 50% uptick from their total market cap on listing and under 2% of the total $5.5trn market cap of all companies listed on the Indian bourses. However, these are the early signs of a change in the composition of the Indian public markets.Let’s look at a few developments:Two dozen startups went public in the past three years.After the sensational listing of Zomato, Paytm, Nykaa, etc, in 2021, startup IPO (initial public offering) listing slowed down in the next two years.From 10 in 2021, it slid to just two in 2022. It then moved up to five in 2023.The mojo is back — 10 startups have already entered the bourses in 2024. This year is poised to be the best so far in terms of the number of startup IPOs.There could be more new-economy listings in 2025. Including eight startups that have filed for IPO, there are at least three dozen that plan to go public in the next 12-24 months.Public markets in VC modeSome of the leading venture capital investors have pointed out an interesting trend. Now, public markets are giving startups a much higher valuation than venture capital and private equity investors in the unlisted world.A case in point is Unicommerce. Its market cap shot up more than 20x its revenue to ₹2,400 crore on listing. The company reported ₹13 crore profit on ₹109 crore revenue in FY24.According to sources in the venture capital industry, this SaaS (software as a service) startup, which helps businesses with e-commerce integration, was in the private market to raise money before choosing to go public. The revenue multiple for an e-commerce SaaS company in the private market is currently around 6x. Evidently, the public market is more generous.The public market, which is generally seen as maintaining a conservative and uncompromising approach to pricing, has become uncharacteristically bullish towards startups. Exuberance, which is generally attributed to venture capital, has now been shifted to public markets. medium112890235Another example is Ola Electric. Before filing for the IPO, the electric scooter maker was in the market to raise $300mn. It settled for less than half of that amount from an existing investor at $5.4bn valuation — a modest uptick from its previous fundraise. This was primarily due to several funding talks with big private equity investors falling through.But Ola Electric had a rousing welcome in the public markets; its market cap touched $7bn within the first few days of listing.Whether this buoyancy stays or not is anybody’s guess. But new-age businesses are going to be a significant part of the public markets. And it will probably be the best source of capital for some of the startups much earlier than they expected.A veteran VC investor who now runs his own fund that invests in early growth stage companies said the current excitement might tempt startups struggling to raise venture capital at series C stage to go public. “If you want to raise $30mn, public markets is the easier option; valuation will be 10-12x revenue,” he said.The Nifty 50 raceVarious factors are guiding this new-found public market affection for startups. The most obvious is the increased public market participation of the middle class, especially the young salaried population, which has strengthened domestic institutional investors.“It is all of us; it is your SIP (systematic investment plan) that is driving this. ₹25,000 crore goes into SIPs every month,” said one of the VCs quoted earlier.This has emboldened mutual funds; domestic institutional investors’ holding is set to overtake foreign institutional investors in the next few quarters.While large corporations take their own sweet time to take public some of their unlisted subsidiaries, several startups that honed their money-raising skills in private markets perfectly timed their IPOs.The influx of fresh capital into the stock market coincided with the new-economy ventures coming of age. India’s digital infrastructure — broadband, smartphones and payment systems — transformed in the past 10 years. The ease of doing a digital business and availing a digital service have tremendously improved over the past decade.About 800mn Indians are estimated to be connected with the mobile internet. With more people using the services and products offered by this new set of companies, they are increasingly seen as real businesses with strong prospects.Leading startups, many of them a decade old or more, have shown that their financials are improving. The number of profitable ones among India’s unicorns has gone up. Their collective revenues significantly increased, and losses decreased as ET Prime explained in this article.The stock market embrace of new-economy companies could well be seasonal. Also, they need to put themselves through the rigour of quarterly profitability test and prove their substance on a recurring basis.Zomato, one of the earliest unicorns, is showing the way here. Quarter after quarter, it showcases growth and profits. And the market richly rewards it. Its stock trades at nearly 4x the IPO price. A venture capital investor with a string of unicorns under his belt said, “I see Zomato in Nifty 50 at some point.”It needs another quantum jump to be there, but that will be a pivotal moment for Indian startups.