; Paytm: Shailesh Andrade / Reuters
In 1998, US ecommerce platform Amazon posted losses after a year of going public. Founder Jeffrey Bezos tried to make investors pad up for a long innings. “Because of our emphasis on the long term, we may make decisions and weigh trade-offs differently than some companies,” he underlined in his first annual letter to shareholders after the company got listed in 1997, just two years after starting operations.
“We expect our losses will continue given significant investments expected towards growing our business,” the company stated in its DRHP, which shared the financials. Zomato posted a loss of Rs107 crore, Rs1,010 crore, Rs2,386 and Rs682 crore for FY18, FY19, FY20 and nine months of FY21, respectively. Interestingly, Zomato and Paytm are not alone in posting heavy losses. Most tech startups that are planning to go public over the next few months have a bleeding bottom line.
“The Zomato IPO is a trendsetter in the Indian startup ecosystem,” says Anil Kumar, chief operating officer of homegrown consulting firm RedSeer. The listing sends three strong signals, he explains.
Third, India could potentially become a global destination for big foreign investors. “Look what is happening in China,” Kumar says. The State is clamping down on startups and the Chinese tech market is becoming dicey for investors. This year, he underlines, India not only got more dollar investment in internet companies than China, but the country also managed to outscore China in terms of unicorns [a startup valued at Rs100 crore].
One of the reasons why the metrics of these mature startups is looking good is due to the fact that customer acquisition cost has come down during the year, he explains.
“When these companies spend marketing dollars on acquiring customers, they are actually going after the consumer who is motivated to do a transaction,” Naik says. “Three or four years ago, they were spending money on acquiring consumers who were probably window shopping, or not yet comfortable with digital transactions.”
The key metrics to track are long-term sustainable unit economics, repeat user rate, cost of customer acquisition, customer lifetime spend and return on ad-spends. “These metrics are important to identify if the company has charted a clear path to profitability in the future,” underlines Kampani.
“Amazon is a charitable organisation being run by elements of the investment community for the benefit of consumers,” Slate columnist Matthew Yglesias commented in January 2013 after Amazon came out with its 2012 earnings report. Bezos did not agree with the assessment. “Take a long-term view, and the interests of customers and shareholders align,” he said in his letter to shareholders.
America’s love with loss-making tech companies remain unabated to this day. In February, Crunchbase looked at 12-month earnings for a sample of 12 venture-backed public companies that got listed in 2020. While three-fourths posted losses in excess of $100 million, companies with the highest revenue also posted some of the largest losses [See box ‘Report Card: Global Tech Companies Listed in 2020’)
Back in India, though regulator Securities and Exchange Board of India (Sebi) has allowed loss-making companies to get listed, it has a built-in mechanism to protect retail investors. Unlike in normal cases where profitable companies are allowed to offer 35 percent of the book to retail subscribers, loss-making companies can offer only 10 percent of its shares to retail investors during the listing. The rule essentially tries to protect retail investors from investing in companies which have not shown any road to profitability.
Zomato’s listing, though, might change the game as profit will take a back seat. “Other loss-making startups with strong fundamentals can opt for this route,” says Ankur Bisen, senior vice president (retail & consumer products division), at Technopak. The IPO, he says, also creates a reference point in a country that is not used to listing of loss-making companies.
Though wooing people on the premise of a promising future is something that investors are used to in the US, in India, this just the beginning. Any comparison with Amazon, he sounds a word of caution, must keep in mind the fact that the US etailer morphed into a huge machinery with multiple revenue engines. Indian startups too must look at various ways to keep expanding the topline, and with an eye for profitability in the future. “End of the day, getting listed is just the beginning,” he says. Markets duly reward the performers and punish the laggards.
Indian tech companies—now making a beeline to get listed—must also keep a firm eye on the weighing machine of the company as well as the markets.