Investing in a startup company is highly risky but can also be rewarding when the investment pays off. However, a fine line distinguishes the consequences of investing in a startup.
The IPO market is trending currently. A lot of companies are filling the Draft Red Herring Prospectus (DRHP) with the SEBI for IPO approval and benefit from the growing market.
2022 marked the launch of many IPOs throughout the year and yet there are many more to be launched by the end of the year.
Some big IPOs that are planning to launch by the end of the year include Electronics Mart India, the famous “hospitality app”, and Mobikwik with the IPO sizes of the company to be 500, 8430, and 1900 crores INR, respectively.
The number of startups has increased significantly from 8971 percent in the fiscal year 2016-17 to 2021-22 with 65,861 startups emerging in 2022. The data was revealed by Commerce and Industry Minister Piyush Goyal.
But, the main question lies if the startups are profitable. If not, why the retail investors should refrain from investing in loss-making startups?
Statistics show that around 95 percent of startups are loss-making, and they burn a lot of cash subsequently. But the surprising factor is that many loss-making startups were able to launch their IPOs despite incurring a heavy loss.
Previously, SEBI did not allow any loss-making companies to go public and raise funds to safeguard the investors.
The decision could be backed up by the loss-making companies going public, raising sufficient funds, and running away after leaving the investors traumatized.
The SEBI’s rule has resulted in startups going public outside the nation. To prevent this, the government allowed the loss-making companies to raise funds, but the value was restricted to 10 percent of the share capital.
Many such loss-making startups launched their IPOs despite being overburdened with heavy losses.
Zomato, one of India’s famous food delivery apps launched its IPO during a time when it was incurring a loss of 63.2 crores INR. The share of Zomato as recorded in March 2022 accounted for an 8 percent decline as compared to the 46 percent rate in the previous six months.
Despite being unprofitable and continually burning cash, Zomato is currently deploying its money in trade and investments.
Investing in loss-making startups comes with high-risk investments. Startup investments are usually made at an initial stage. The business model and the team can prove to be inefficient or unstable, thus, the main loss will be shed by the retail investors, who will have a high risk of losing their funding when the company goes defunct.
It is added to the volatility that the start-up faces in terms of its money, investors, and founders. As a result, there involves a high level of risk and uncertainty at all times from a financial or emotional viewpoint.
To understand the risk of investing in loss-making startups, let us take an example of a famous hospitality app.
The company became the center of attraction after its launch, and the CEO of the company became the youngest self-made billionaire at a tender age.
The hospitality app filed its preliminary IPO documentation in 2021 but had to back out from the listing plan earlier after the pandemic hit the Indian economy.
The company experienced such a massive loss that the Federation of Hotel and Restaurant Associations of India had to urge the SEBI to call off the hotel room aggregator app’s IPO to prevent the draining of public wealth.
Reports show that the company incurred a loss of 3943.84 crore INR in the fiscal year 2020-21.
The vice president of FHRAI has stated that the hospitality application was incurring losses since its inception in 2013. It may have raised a huge amount of money to become known as India’s most promising start-up, but it has failed to manage its funds efficiently.
Who suffers the gravest loss? It is the buyers or the original holders of the IPO who may liquidate their stocks, but the enforcement of no sell-off period makes them vulnerable to losses resulting in the values of the stocks to further declining.
The business and market conditions may change during the time frame to result in the detriment of the stock price.
The conclusion is that Paytm, Zomato and Nykaa launched their IPO despite being loss-making companies since they were founded, and we have visualized the consequences.
Zomato, Paytm & Nykaa all tanked on the share market.
If we talk about Paytm, the share listed on an exchange for 2050, and today the share value is only 600. The decline has been significant
The ultimate loss came only to the common people, who were the retail investors.
The investors like Alibaba exited after making profits.
The founder of Paytm, Vijay Shekhar Sharma also is getting a salary of 6 crores annually, today he drives a Jaguar Land Rover, which he even rammed into the car of Delhi police south district DCP Benita Mary Jaiker, that is another story, but the point here is that Vijay Shekhar Sharma was 15 years back taking a salary of 10,000 INR what magical happened or what he did in last 15 years that he started getting the salary of 6 crores that too in a loss-making company.
The game is very simple. Launch any stupid venture with a dumb idea, take funding, inflate the valuation, launch an IPO with an inflated valuation, pass your losses to the common public acting as retail investors, and give exit to investors with 10-20 times the return, raise your salary 300-400 times and finally after launching the IPO and passing your losses to retail investors, shut down the venture and run away.
The same situation will be repeated multiple times.
The same happened with Flipkart, we all know Flipkart was sold to Walmart, and at the time of the sale, Flipkart was in a loss of 8,000+ crores. Today Sachin Bansal and Binny Bansal have become so-called investors making investments in other’s ventures.
The situation seems sounds ironic that someone who had been seeking funds to run his venture four years back has now become an investor with the money he got after selling his loss-making startup, but it’s true.
edited and proofread by nikita sharma
