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A New Growth Path for Indian Startups, ETCFO

The Indian startup ecosystem is experiencing a major shift as Initial Public Offerings (IPOs) become a key avenue for raising capital. In 2024, mainboard IPOs have surpassed the Rs 1 lakh crore mark in fundraising for only the second time in history. This year till date, 70 IPOs have been launched—the highest since 2007 — raising over Rs 1.03 lakh crore. In comparison, 100 IPOs were launched in 2007, raising Rs 34,179 crore, while in 2021, 63 companies raised over Rs 1.19 lakh crore through IPOs.

This impressive growth comes even as global IPO markets are experiencing a slowdown, with a 12% drop in listings and a 16% decline in capital raised. India’s unique combination of economic stability, a booming digital economy, and a maturing private equity (PE) and venture capital (VC) ecosystem has set it apart on the global stage.
SME IPOs have also seen substantial fundraising activity this year. To date, 215 SME IPOs have been launched, raising a record Rs 7,700 crore. In contrast, 182 companies went public last year, collectively raising over Rs 4,686 crore.

So, what are the key factors driving this IPO boom in India, and how is the digital economy creating a new growth path for startups?

Strong Domestic Demand

India’s thriving IPO market is strongly supported by robust domestic demand, fueled by both retail investors and institutional participation. A steady flow of capital from Indian savers has played a critical role in maintaining momentum in public offerings. This consistent investor confidence has created a favorable environment, making India one of the most active markets globally for IPOs and secondary offerings.

The pipeline for future offerings remains promising, with a significant number of companies gearing up for listings. This demand, coupled with a maturing financial ecosystem, ensures that the country’s IPO market continues to attract liquidity, helping both SMEs and larger companies raise capital. The enthusiasm among domestic investors has cemented India’s position as a leader in IPO activity within the APAC region.

The Role of the Digital Economy

India’s digital economy continues to offer fertile ground for innovation and growth in public markets. In the first nine months of 2024, six new unicorns (startups valued at over $1 billion) emerged, further strengthening India’s position as a global leader in tech startups. Additionally, 29 tech companies went public, benefiting from the growing startup environment.

Fintech and retail sectors, in particular, have shown strong growth, leveraging India’s robust digital infrastructure. These industries are leading the rise of tech-driven IPOs, as digital-first companies look to scale and expand market share.

India’s focus on building scalable digital public infrastructure, like UPI and India Stack, has enabled startups to streamline operations and improve customer acquisition, making them more attractive to investors. The rapid growth of the digital economy, projected to contribute $1 trillion to GDP by 2025, has created an environment where startups can scale faster, increasing interest in public listings.

Retail Investor Participation

Retail investors have become a driving force in India’s stock market, significantly contributing to the growth of the IPO space. The number of demat accounts has surged from just 4 crore in 2020 to an impressive 17.5 crore in 2024. In September alone, 4.4 million new demat accounts were added, continuing the trend of 4 million monthly additions throughout 2024.

This growing investor base is not just limited to trading but is also seen in their long-term equity investments. Domestic household investments in equities reached Rs 128 trillion in FY 2024, a sharp increase from Rs 84 trillion in the previous year. This surge in retail participation showcases the increasing financial awareness and confidence among Indian investors, further supporting the country’s buoyant IPO market.

India’s Strength in the Global IPO Market

Despite the global IPO market facing headwinds, India has emerged as a standout. In the first half of 2024, India led the Asia-Pacific (APAC) region, accounting for 227 IPOs that raised $12.2 billion, largely driven by small and medium enterprises (SMEs). Globally, the technology and industrial sectors have been dominant, but India’s startup ecosystem has been particularly active. With 153 companies making their debut—77% of them SMEs—Indian startups are increasingly turning to public markets as a viable option for growth.

One of the major factors driving this trend is the success of PE/VC-backed IPOs. Globally, these accounted for 41% of IPO proceeds in the first half of 2024, up from just 9% a year earlier, with India playing a significant role in this growth. This indicates that private investors, who previously focused on scaling startups, now see value in taking them public, offering liquidity and solid exit strategies.

Key Considerations for Startups Going Public

As India’s IPO market grows, startups must consider several key factors to succeed in public markets. One of the biggest challenges is meeting shifting investor expectations. Over the past two years, global investors have become more focused on financial sustainability and profitability. Gone are the days when growth at all costs was enough to attract funding. Today, startups must show a clear path to profitability and strong governance.

1. Governance and Accountability

Going public requires institutionalization, as it brings increased scrutiny and accountability. Startups must implement mature processes, establish strong governance frameworks, and ensure transparency. A well-structured board, with independent directors and experienced advisors, plays a key role in guiding companies through the complexities of public markets.

2. Financial Discipline and Long-Term Vision

IPOs are not just about raising capital; they also serve as a price discovery mechanism. Startups need to balance short-term shareholder returns with a long-term vision. One common pitfall is focusing too much on stock performance, which can lead to short-term decisions that harm the company’s broader strategy. Startups should avoid setting overly high IPO prices, as this can create pressure to meet inflated valuations through risky actions.

3. Investor Relations and Market Perception

After listing, startups face the challenge of managing investor expectations. Public markets can be volatile, and market sentiment may not always align with a company’s long-term potential. Building strong investor relations and maintaining open communication is essential to managing perceptions. Startups must be prepared for market swings and ensure that management stays focused on long-term goals, even in the face of short-term volatility.

4. Life Stage

Startups often go public when key investors or employees are seeking liquidity. From a macro perspective, balancing fresh capital generation and offer for sale (OFS) is essential for the development of a robust capital market. Organizations should invest adequate time and effort to ensure that their business models, processes, and operating styles are mature enough. Since public money is involved, businesses must be prepared to operate under constant public scrutiny. As more proxy firms evaluate and make recommendations on company proposals, it becomes crucial to maintain a proper balance of sound business practices and decision-making.

The Path Forward: Embracing a New Growth Path

The IPO boom in India reflects more than just a surge in capital markets; it signifies a deeper shift in how startups are approaching growth and sustainability. The convergence of a thriving digital economy, a maturing startup ecosystem, and favorable macroeconomic conditions has created a perfect opportunity for companies to go public. As more startups take this route, they will help shape the future of India’s economy by fostering innovation, creating jobs, and contributing to the nation’s economic resilience.

However, success in public markets is not guaranteed. Startups must invest in the right systems, processes, and governance frameworks to navigate the complexities of being a publicly listed company. By focusing on long-term sustainability, maintaining financial discipline, and adopting transparent governance practices, Indian startups can not only survive but thrive in this new growth path powered by the digital economy.

Conclusion

The Indian IPO market is set to continue growing, offering startups a powerful platform to raise funds, boost credibility, and accelerate expansion. As the digital economy evolves, it will create fertile ground for startups to innovate and scale. However, success in public markets requires careful planning, strong governance, and a commitment to long-term value creation. For Indian startups, embracing these principles will be key to unlocking the full potential of this new growth path.

<p>Mandeep Mehta, CFO, PB Fintech </p>
Mandeep Mehta, CFO, PB Fintech

About the Authors: Mandeep Mehta, CFO, PB Fintech

Disclaimer: The views expressed are solely of the authors and ETCFO.com does not necessarily subscribe to it. ETCFO.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.

  • Published On Oct 26, 2024 at 02:15 PM IST

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