Anyway, the segment that was sent to me was a point made by Shankar Sharma, founder of GQuant Investech, the third panellist at the event. It’s about a minute long, and Sharma is trying to illustrate how venture capital was distorting the valuation of companies when they went public. 

Primarily, his argument is that great companies are those who generate sustained long-term return to shareholders. He illustrated his point with examples of great companies like Apple, Microsoft, Amazon, and Infosys which had listed quite early in their journey, and as a result, were able to provide returns to shareholders. He believes that all this has changed due to venture capital. 

In his words,

Anyway, the reason why I was struck by this argument is because Sharma’s argument comes from the perspective of a retail stock-market investor, not a VC investor. I wasn’t the only one. Kunal Bahl, CEO of Snapdeal, a company that essentially rose, fell, and is trying to rise again on the back of private capital, shared Sharma’s segment on LinkedIn with some commentary: “This may seem like contrarian advise [sic] versus the US model of growing tech companies to large scale with VC/PE and then going public. But for a variety of reasons, this does seem like a very cogent, higher probability of success path for successful tech IPOs in India”.

For a long time, especially in India, an IPO was considered the pot of gold at the end of the rainbow. Work hard. Grow fast. And once you’ve found a great business model, go public and list on the exchanges. Historically, this is how companies have always grown, raised capital, and over time, become valuable. This is also why IPOs are priced to generate more requests for shares than those available, so that retail investors see a “pop” when the company lists. Immediate returns. There’s a reason why IPOs work for everyone. 

At some level, tech startups just inherited this model. Except, they added one step in between, i.e., raising from private investors. This is the model that US startups created and Indian startups adopted. And the list of such startups grows longer every year—Uber, Doordash, Paytm*, Zomato, Nykaa. And others also want to follow their path. Oyo. Mamaearth. Ola. 

The march from private to public continues, and goes on and on. 

But does it make sense?

Do Sharma and Bahl have a point, when they believe that this model doesn’t work for tech startups?

Well, I believe they do. 

So in today’s edition, I’ll illustrate an alternative path that Indian startups can consider. I’ll do it using numbers, a few charts, and most importantly… ducks. 

Yes. Ducks. 

Let’s dive in.

Back then, my scepticism was driven by the size of the market, but now it’s clear that even the public markets have decided that these valuations don’t make sense anymore.

And once you look at these companies that go public, you’ll see that they follow a predictable pattern.  

Take Zomato. In its last pre-IPO private funding round in early 2021, it raised at a valuation of US$5.4 billion. Then, when it went public a few months later, it listed at US$8.6 billion, which subsequently swelled and grew to US$13.2 billion on the first day. Over several years, until the day it went public, Zomato was fattened by private capital. Then, it was slaughtered in the public market. In February 2023, its valuation was around US$5 billion—lower than its last private valuation. 

A similar trend exists for all other companies. Paytm was valued at over US$16 billion in its last private round, after years and years of fattening. Then it went public. Today, it’s valued at a little over US$4 billion. Nykaa is a bit better, likely because the founders still retain significant control and ownership over the company, which probably saved them from the great fattening. But it hasn’t been unaffected. Its last known private valuation was a little over US$2 billion. It was listed at US$7.5 billion and swelled to nearly US$14 billion. Today, it’s less than US$5 billion. 

If you plot the trend, it looks a bit like this.

You may argue that this is happening because of the economy. But that’s not true. Zomato, Paytm, and Nykaa all saw significant erosion in value in the public market way before the great slowdown. In fact, you’ll see a similar trend play out for US startups as well. 

Take Uber. For a long time, it was considered as the golden child, especially among private investors. For years, Uber’s private valuation grew and grew to absurd levels. Before it decided to go public in 2018, VCs had valued the company at US$76 billion dollars. In late 2018, Wall Street banks were convincing the ride-hailing company that it could fetch a valuation of as much as US$120 billion when it went public… an even more absurd number. 

Uber finally went public in early 2019.  

Today, four years later, it’s valued at a little over US$60 billion… still below its last private valuation. 

The ducks have been fattened. The juice of returns is sucked out. 

And this trend continues even today. 

If you talk to VCs, they’d argue that there’s plenty of juice still left in these companies, and it’s just that retail investors need to be patient. Economies of scale dictate that as companies get bigger and become near monopolies, they’ll capture more value, costs will fall, and these companies will eventually become profitable. This is why VCs (and companies) focused on increasing transactions and GMV (Gross Merchandise Value). And as I’ve written earlier, Amazon and Flipkart have chosen to double-down on this approach. Transactions are seen as desirable. Make people buy. Take a cut. Profit.

Well, let’s just say that logic is starting to look shaky. 

Flipkart has captured the e-commerce market as much as it possibly can. Unprofitable. Swiggy and Zomato. Unprofitable. Uber remains the largest ride-hailing company in the world. It’s captured markets globally, in multiple countries. Still unprofitable. 

Maybe it’s time we liberate startups from valuations they can never hope to hold on to. Especially if these valuations are imposed on them by VCs during the great fattening so that they stand to gain the most when these companies go public. Maybe it’s time we skip the mandatory value creation and value destruction cycle perfectly good companies have to go through when they go public.