Whether to List Locally or Abroad for Late-Stage Funding

Whether to list locally or abroad, is a tough question for startups seeking late-stage funding.

In 2010, a decade after it was founded, online travel portal MakeMyTrip (MMT) was ready to get listed on the stock exchanges, reports Economic Times. The only problem? The investors in MMT were split down the middle on where it should be listed: in India or the US. Two large investors along with a few independent directors were keen on a US listing, whereas another investor along with an independent director reckoned a local listing was best.   Cofounder Deep Kalra was torn. To make a decision, he decided to look beyond MMT, to at least six of India Inc’s best minds, including Ajit Balakrishnan, founder of digital content firm Rediff.com — which listed on Nasdaq in 2000 — and Infosys director TV Mohandas Pai. Based on their inputs, Kalra took the call to list on the American exchange. “We wanted to raise $80 million in 2010, and we ended up collecting 15x,” recalls Kalra.   In the seven years since, only two Indian companies — Azure Power and travel portal Yatra in 2016 — have gone on to list on the American exchange. But as valuations come under pressure and raising further rounds of funding becomes increasingly difficult, a listing may be one of the very few options for Indian tech and digital firms. And where better than the exchange that’s home to tech and internet bellwethers like Microsoft, Intel, Cisco and Amazon?   

Newspapers have been reporting since mid-2015 about etailer Flipkart readying for an IPO on Nasdaq. Last month, Business Standard reported that the decade-old ecommerce firm had hired top auditing firms to begin the process of filing for an IPO on the American bourse. Flipkart did not respond to queries from ET Magazine on a proposed listing.   

Flipkart may not be the only internet firm eyeing a US listing. Another ecommerce unicorn ShopClues says it is planning to make its debut on the Nasdaq by the end of the year; online insurance platform PolicyBazaar is exploring a listing on the US stock exchange; and GirnarSoft, which runs auto portals CarDekho, Gaadi and Zig-Wheels, may also take the plunge.   So, are Indian startups finally ready for Nasdaq? Kalra reckons so. The ecosystem is maturing, even as another round of high-value funding looks tough. Entrepreneurs, contends Kalra, would look to go to a place where they would get a depth of investors — who are more likely to buy into their story than back home, where appetite for the new economy is still low. What’s more, a listing is impossible for loss-making firms — which most online ventures are.   “Even if you are unprofitable but have a sustainable business model, you will find takers at Nasdaq who realise the value of scale,” adds Kalra.   

For Yatra, the second online travel portal from India to get listed on Nasdaq through a reverse merger, it was a huge leap of faith. “We had the right internal structure, processes and systems in place to take this huge leap forward,” says CEO Dhruv Shringi. Yatra was founded in August 2006, had raised $222 million before it got listed and counts Reliance Capital, IDG Ventures India, Intel Capital and Norwest Venture Partners among its investors. The company with a network of some 61,000 hotels, 14,000 travel agents across 1,100 cities and gross bookings of $897 million in fiscal 2016 has a market value of some $347 million after listing. Nasdaq provides established valuation benchmarks for companies, which is something missing in India, says Shringi.    

Venture capitalists contend that Nasdaq is better suited to, and more appreciative of, the nuances of a new tech company than the Indian stock exchanges. So, it can offer better price realisation. “Time seems ripe for getting listed,” says Shubhankar Bhattacharya, venture partner at Kae Capital.   The relative dearth of funding will not only enforce frugality and more prudent business decisions, but also lead to a rationalisation of valuations that will be closer to public market norms, he says.   

Apart from injecting the much needed liquidity, a listing provides an avenue for investors to make an exit. Any company — whether unicorn or otherwise — that has had investors for 10 years is under pressure to give investors a lucrative way out, says Sandeep Murthy, partner at Lightbox Ventures. “The pressure to get listed is real,” he adds.   Last November, Morgan Stanley marked down the value of its holdings in Flipkart by about 38% — a fourth valuation markdown in a year — which pegged the etailer’s valuation at $5.54 billion. And, last week, US mutual fund giant Fidelity Investments slashed the valuation of its holdings in Flipkart by more than a third, at roughly $5.58 billion.   

For a highly funded company, explains a foreign VC who is an investor in one of the Indian unicorns, listing appears to be the only way out as raising a new round of funding at a drastically marked-down value would do more bad than good. “How long can investors burn money in any company? They are getting edgy,” he says, requesting anonymity.   Radhika Aggarwal, cofounder of ecommerce marketplace ShopClues, insists it is not pressure from investors that’s nudging her towards Nasdaq. Rather, it’s a well-calibrated plan and a key stopover on the roadmap for growth. Aggarwal pegs ShopClues’ valuation at over $1.1 billion; the firm that has raised $200 million so far from the likes of Nexus Venture, Helion and Tiger Global claims to be on track to break even in 2017-18. “We will be ready to list by year-end,” she says, adding that the long-term goal of the company was always to go the IPO way.   

Aggarwal stresses that “VCs are not running out of patience”, and that the private pool of capital is still dense enough to delay listing.   For instance, Uber or Airbnb, which who have raised billions of dollars, are nowhere close to going public. “They feel that there is so much of opportunity to grow that way,” she says. Yet, she maintains that ShopClues is on track to be one of the fastest — if not the fastest — unicorns to get listed.   Experts say that a listing is no walk in the park. To go public, says venture capitalist Sid Talwar, one needs to have strong corporate governance, discipline and excellent processes. “You go public when you have your business figured out,” says Talwar, cofounder of Lightbox Ventures. And, once public, valuations normally reflect the profitability of a company or at least a roadmap to profitability at some point.   

In today’s market, Talwar explains, for many potential IPO candidates, there’s the added burden of high valuations pre-IPO. Will they be able to achieve a publicly tradable price in the same range, irrespective of the quality of the business? One has to remember that less than 300 venture-backed technology companies have ever gone public.   “And that’s before you look at how many of them struggle post IPO,” he says, asserting that Indian startups are not prepared, for one reason or the other, to list. “I do hope they will be soon.”   PolicyBazaar, an online financial products platform that has raised Rs 500 crore since its inception in June 2008, believes that it is prepared for listing. “We are open to the idea of exploring listing on Nasdaq,” says Alok Bansal, cofounder of PolicyBazaar.   
The company claims to be on track to break even this fiscal, has investors such as InfoEdge (Naukri.com), Tiger Global and Premji Invest, and claims to have a valuation of over Rs 2,500 crore. Bansal dismisses the theory that a funding crunch is making companies tread the listing path. “I don’t think any of the scaled-up businesses have a liquidity problem,” he says.   Bansal believes that listing serves multiple purposes: it shows to the world that the company has come of age, and the business model is settled. And listing on Nasdaq gives an added edge as investor mindset in the US is slightly different than in India.   

The US market, he reckons, would focus on growth for a digital business, even if it’s a loss making one. Back home a strong balance sheet and profitability are bigger concerns on the bourses. If the market is not rewarding one for growth, then the whole strategic positioning at the management level undergoes a makeover and can impact the business severely, explains Bansal.   Umesh Hora, chief financial officer of GirnarSoft, too maintains that it may be worth exploring Nasdaq listing as the US platform is the go-to stock exchange for growth-oriented tech companies.   However, Hora sounds a word of caution for overzealous startups. An IPO requires introspection, a certain scale of business and long-term planning as going public, among other things, translates into additional corporate governance, and increased regulatory and investor scrutiny and costs. Moreover, one needs to understand that the current funding crunch is simply a much needed course correction, he says.   Rather than consider Nasdaq listing as the best option, the time is ripe for startups to rework their business models to get to a stage where they are able to build truly sustainable and profitable companies.   

In sharp contrast to Hora, there are others like serial entrepreneur K Ganesh who prefer an Indian listing. Reason: norms of disclosures and compliance have been relaxed, the government is open to feedback and the authorities would be willing to go the extra mile to ensure that more startups get listed in India. “Listing in India provides good visibility, reinforces trust, brand recognition and gives credibility across the country among retail investors,” he says.   While conceding that US listing gives access to the largest source of capital in the world and access to debt improves, Ganesh believes that the cost of listing, compliance and ongoing follow-up is substantial and off-putting for the Indian companies. The Securities and Exchange Commission’s (SEC) accounting, disclosure and reporting requirements are cumbersome and a big distraction for an Indian company in the startup stage.   

The investors might get wary more easily, leading to price variations unconnected to the core business metrics, he adds.   Though listing, lets on Ganesh, is definitely the best way to monetise in terms of returns to investors and shareholders, it is a tough life with continuous quarter– on-quarter pressures of disclosure and scrutiny by analysts. While companies like Infosys have managed it brilliantly, there have been many who got listed and withered away, he adds.   Last April, Rediff announced that it had applied to the US SEC to delist from the Nasdaq Capital Market. The decision came a couple of months after the portal received a notice from Nasdaq that it had failed to satisfy the minimum bid price requirement of $1 per share.   “The company believes that it may be difficult and expensive to try to regain compliance… and therefore has determined to voluntarily delist from Nasdaq,” Rediff had said in a media communication. Clearly, one way to avoid such a fate is not to list at all if one is not ready for the big leap.

SJP @DigitalAsian - ShareYaar

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