The boost offered to start-ups by the Securities & Exchange Board of India (SEBI) is a good move to encourage new enterprises to list in India. It holds the promise of providing start-ups with alternative routes to capital, relaxation in disclosure norms of funds accumulated, simplified bidding, e-IPO, lock-in of entire pre-issue capital and definition of promoters. On the other hand, it offers HNIs and conventional investors a new class of investments (as in tech start-ups). These measures are very positive and indicate more progressive thinking within the SEBI and other governmental organisations. But it may not be enough, unless several other associated measures are put in place as well. It moves to a new normal of supply and demand, or does it?
Enterprise start-ups ... err... What?
The start-up investor community in India is small today, and it is safe to assume that we will open up this segment and see an exponential increase with more small scale enterprises (SSEs). While these new investors may be excited to join the group, they may need to learn the ropes of technical investment -- which is high risk with a potential for high reward. B2C investment in e-commerce (Ola, Snapdeal, Flipkart etc.) and shared economy start-ups may be closest to their earlier investment history based on revenue, profitability, unit economics and subsidy for capturing market share. B2B and B2B2C investment decisions will be value driven, which is quite removed from their experience base. Perhaps only much later-stage start-ups in this space can plan on listing as it would be difficult to make the numbers work for the uninitiated.
"Start-ups need to understand that while this expansion of the investor pool will bring in funding... It may not get start-ups the mentorship and network an established VC or tech investor can offer. "
There are plenty of globally renowned enterprise start-ups such as InMobi and Freshdesk who will not look attractive to the new investors, despite their traction, simply because they are not very familiar with the world of B2B start-ups. To an average Indian investor, it is really the B2Cs that represent the start-up community in India.
The investor community will take time to develop that understanding, and embrace all good start-ups, irrespective of the vertical. Although there is a minimum requirement of Qualified Institutional Buyers (QIB) to be holding shares prior to issue, we still need to safeguard these new set of investors, by 'accrediting' them and perhaps educating them so they can join the investment bandwagon. At the same time it is also important that we ensure they are well aware of the nuances of the risks they are taking and do not burn their hands with wrong expectations.
We need to pivot... can we please?
Start-ups need to understand that while this expansion of the investor pool will bring in funding, it also creates a level of abstraction between the investors and start-ups. It may not get start-ups the mentorship and network an established VC or tech investor can offer. At the same time start-ups (even if they are more than three years old) thrive on nimbleness and agility. They derive much of their ability to be dynamic and successful by not being answerable/communicating coherently to a large number of stakeholders. Garnering the support of a few tech-savvy investors who understand, appreciate and encourage this behaviour is much easier than adapting to a greater pool of new, conventional investors. This complication in investor relations may lead to many A-list start-ups not being keen on the Stock Exchange initially.
With the possible exit of certain VCs, and some QIBs at listing may send the wrong signals about the strength and investibilty of the start-ups.
Bring in the cavalry!
It is very important that the first set of listings on this Institutional Trading Platform (ITP) be curated to include strong ones with great success rates, perhaps even better than ones achieved by the SME exchange. For this to happen, everyone in the ecosystem needs to be energised - investment bankers, institutional investors, marquee investors, mentors, accelerators, and thought leaders. To serve the primary purpose of attracting Indian start-ups to list in India it is important that the government brings more reforms on matters like IPR protection, angel investment taxations, regulatory norms for starting, running and closing of businesses for start-ups, and single window clearance mechanisms. Only then and together as an ecosystem, we can keep the economic value created by start-ups in India.