Will Paytm's poor debut hit Indian start-up ecosystem's funding and valuations?

When one of the preeminent fintech companies in India, and a recognizable brand that too, after raising a record Rs 18,300 crore ($2.2 billion), lists on the stock exchange at a steep 27 per cent discount to the issue price -- which translates to a valuation drop by at least $3.5 billion -- there must be something seriously amiss in the recent ongoing IPO boom that has caught Indian start-up ecosystem's fancy. What is incredible also is the fact that despite Paytm's disastrous stock market debut, a majority of the stakeholders in India's bourgeoning start-up community chose instead to relish the moment rather than introspect as to what really went wrong. Especially at a time when venture capital funding for Indian start-ups is overflowing, and has surpassed economies like China this fiscal with a record 37 unicorns being added in just 2021 alone. Notably, in addition to a cumulative $5 billion plus fund raise during the IPOs of 5 unicorns till now, experts argue that Paytm's poor show can adversely impact two major upcoming listings, that of the hotel chain OYO, and the cab hailing firm Ola.

From industry body NASSCOM to some of the big unicorns, the industry described Paytm's journey as momentous, without commenting on the Rs 37,000 crore wealth drain that took place from the pockets of big mutual funds and retail investors on the listing day.  As reported by BusinessToday.In, some of the biggest gainers from the Paytm IPO were the earliest backers and promoters of the payments company who saw returns in the range of 100-1000x.

However, when it came to some of the top mutual funds in India who got on the Paytm train during the IPO, which includes names like Birla Mutual Fund, Mirae Mutual Fund, and HDFC Mutual Fund, the wealth drop was humongous.

NASSCOM, for instance, said that it cannot comment on an individual company's journey. Top venture capital firms and start-ups too chose not to attribute any statements to the trend.

However, some industry observers do point out that despite the lacklustre debut of Paytm, the trend about going public will not stop, and, in fact, it is inevitable.

"The success or failure of a single listing will not and should not stop the inevitable. The IPOs of the large tech companies is inevitable. This trend has taken place in US, in China and in UK and India will follow the trend.  While on the day of listing, Paytm has fallen around 25 per cent, let us also remember that Facebook had listed 9 years ago at $38 a share and within a week it was at $26 and today, after nine years, is almost 5 times the IPO price," argues Bhaskar Majumdar, Managing Partner, Unicorn India Ventures .

But, not everyone is convinced. According to Anurag Singh, Managing Partner, Ansid Capital, Paytm's listing could substantially impact investors sentiment as well as the funding trail in the long-term, even as start-ups like Ola and OYO may just be able to make their debut at reasonable prices.

"There is a pattern we have seen when it comes to the listing of unicorns in India lately. The start-ups heading for IPOs are only disclosing their last three-year financials with almost 60-70 per cent sudden drop in marketing/ promotion spends in the IPO year only to avoid showing huge losses. This, in itself, is questionable. At this point, I do not see a clear-cut path to profitability when it comes to Paytm. It also failed to capitalise post the demonetisation moment, especially in the UPI payments category, which is the largest mode of digital payment now. Paytm has been pushed to the third position by the likes of PhonePe and Google Pay," Singh said.

He cited Paytm's inability in capturing a majority market share in any segment as one of the challenges the company's CEO, Vijay Shekhar Sharma, would face head-on henceforth.

"When it comes to new-age internet firms, be it the likes of Amazon, Netflix or even Zomato and Flipkart, look at the kind of market ownership they have. This is a pattern which is repeating in case of digital companies and Paytm has to consolidate there," the investment advisor told BT.

A passive fund manager wishing not to be named commented that Indian start-ups are falling to the high valuation chase game, which has happened in the US and China with the same set of investors, like Softbank and Tiger Global looking to double and triple their profits within the shortest span of time and dilute their stakes through public issues. "The Softbank backed co-working major, WeWork faced a similar debacle when its public issue crashed due to corporate governance issues," the fund manager said.

However, Ankit Kedia, Founder of VC firm, Capital A has a contrarian view. "First of all, we all should celebrate since it is a historic day for Indian primary markets as Paytm was the biggest ever IPO and India have got its youngest billionaire. The success of such a huge IPO, that too after so many large issues which already hit the market, suggests the liquidity in the markets is ample and is hunting for good business ideas," Kedia said.

"This success also suggests that our country is blessed with huge talent inside deep pockets as we all know that Shekhar Sharma was born in a small town in U.P and was barely earning Rs 10,000 per month. The sharp correction in the share price after the listing is nothing but a market phenomenon and the share price will settle down in the due course. As we all know that FIIs are continuously selling in the Indian markets since last 1 month and the brunt of the same is being felt by many good stocks e.g HDFC Bank being down 9 per cent MoM," he added.

He noted that public markets do notice valuations and future cash flow visibility. "So, if the company is good then market will surely reward no matter what happens to Paytm or any other company," Kedia said.

Also Read: Despite Paytm’s lackluster listing, Chinese investors Ant Financial, Alibaba make $1 bn

Also Read: Paytm wipes out Rs 38K crore in investor wealth after stock slips 27% on market debut