Uday Kotak Warns IPO-Bound Startups 'Cinderella Times Won't Last'
Billionaire banker Uday Kotak advised startups to get a "thorough health check-up done" before going public to prevent premature launches as India's easy-money driven IPO boom will soon run into reality of rising rates.
Startups should be aggressive in spirit, but should hasten cautiously, said Kotak, addressing ‘The Start-up Boardroom: Building for the Future’ conference by the Institutional Investor Advisory Services. "That's crucial when you want to come to the capital markets. Premature launches run the risk of accidents."
It should be the responsibility of startups to make sure investors have the opportunity for sustained growth, instead of only listing day gains, he said. "Compounded annual growth is what endears investors."
Some of India's unprofitable startups, including Zomato Ltd. and Paytm's parent One97 Communications Ltd., made their market debut in 2021, a record year for maiden offers. And the boom is likely to carry into 2022 as retail investors drive equity markets when borrowing rates are at record low and the economy is flush with easy money.
'Cinderella Times Won't Last'
Kotak, however, advised startups to brace for a time when real interest rates will come into play, as the price of money is important in pricing equities.
"The last two years have seen investors assume that near-zero interest rates will remain forever. The cost of money has begun to go up now, and we should see risk pricing and present value pricing come into valuations of startups," he said. "The Cinderella times won’t last forever, and we're not far away from the clock striking midnight."
According to Kotak, India is at an early stage of startups going public and the markets "will over time get smarter in recognising what works and doesn't work in these startups".
Get Out Of The Comfort Zone
Kotak called venture capitalists and private equity firms as one of the biggest "boons" for entrepreneurs in India. "They have supported dreams and brought about major changes in the startup ecosystem. This form of capital has saved the day for Indian startups."
He advised VCs and PE firms to introspect how they are aligning themselves with the long-term goals. "Firms must make sure there's no conflict of interest at the time of their exit, and what’s right for the company. They must questions whose interest they are obliged to serve – maximising their own returns or the company’s vision."
Kotak advised startups to take risks and step out of the usual hubs of Gurugram, Pune, and Bengaluru. "Bengaluru is the best place for tech talent, but it is far more attritive than any other geography," he said. "Tech talent is now growing in different parts of the country and there’s talent at lower cost which is more stable."
After Covid-19, "geography is history" and markets/hubs have opened up in newer places, with physical distance no longer being a barrier, he said.