The Exit Barometer: Why exits will settle the question of excess versus success

Key stakeholders have many perspectives on the startup ecosystem – ranging from a bubble to bloodbath to ‘normalcy’. But most agree that the number of successful exits investors get would be one of the best validation of the funding decisions made in the past couple of years. YourStory explored the potential candidates and nature of companies that can offer their investors such an exit by 2020.

The good news is that, despite only a handful of tech startups like Info Edge, MakeMyTrip, Justdial and Infibeam having staged successful IPO’s till date, the next four years could witness around 20 companies (a healthy mix of consumer Internet and B2B companies) with massive scale that are strong candidates for market listing. Shailesh Vickram Singh, Executive Director of Seedfund, says:

Consumer Internet companies including Flipkart, Paytm, Voonik, Ola, and Snapdeal amongst several others are likely to provide exit opportunities to their investors in the next four years.

According to Shailesh, the road to an IPO for these companies looks like a real possibility, with the risk of a global slowdown and uncertainty as the biggest issues to surmount.

An IPO seems a distant dream for consumer Internet companies at least for the next two years, as they’re yet to achieve massive scale without operating losses. Currently, India has about 50 million online shoppers, but this figure is slated to touch close to 180 million by 2020. “Hitting public markets with this scale would be a good idea,” says Satish Meena, Forecast Analyst at Forrester. “Infibeam’s IPO is a silver lining for other consumer Internet companies, but one has to remember that it’s more of a B2B business,” he adds.

Currently, online retail constitutes little more than one per cent of overall retail, but it’s slated to reach about seven per cent by 2020. According to several estimates, the online retail market would be anywhere between $75 and $80 billion by 2020. To put this in perspective, the modern trade or large format retail stores made famous by Shoppers Stop and Big Bazaar, etc., managed to list in markets at a share and size that was much smaller than this.

100 exits by 2020!

While staging small IPOs will be a trend for B2B startups in the coming years, massive IPO’s can come only from consumer Internet companies. Some unicorns (B2C) will eventually attain massive scale to deliver a mega public listing. Ashish Kashyap, Founder and CEO of Ibibo Group, adds,

I see at least 100 exits by 2020. About 20 companies are likely to give an exit to investors and each company will be acquiring at least five startups. Consumer Internet companies with scale will require a robust backend to run their front end. They will have to acquire SaaS-based ventures or vertical focussed consumer plays to ramp up their show.

Staging IPO by loss-making unicorns will largely be correlated to capability of raising investments. Fundraising activity used to be a quarterly event for consumer Internet companies. “After GMV, digital wallet and payment become focus areas as they build momentum for the next round of funding. Raising investments would be difficult for companies like Flipkart, Ola, Snapdeal, Zomato, and Quikr. The next 12–18 months will lift the clouds on companies preparing for IPOs,” adds Meena.

On the lines of Ashish and Shailesh, Alok Goel of SAIF Partners also expects about 100 exits by 2020. he says,

At least two players in each vertical in the consumer Internet space will be likely to give exit (via M&A) to investors.

He also contemplates chances of 50 exits (mix of IPOs and M&A) by strong SaaS-based companies.

The battle between B2B vs B2C companies

While massive IPOs are expected from consumer Internet companies, small and medium IPOs will be witnessed more from B2B companies. “SaaS-based startups (targeting at global markets) will stage early IPO than loss-making consumer Internet companies,” says serial entrepreneur and author, Kashyap Deorah. B2B technology startups such as Freshdesk, Capillary Technologies, Druva, Browserstack, Billdesk, amongst several others are also expected to provide exit. When asked why consumer Internet companies can’t stage IPOs before B2B startups, Kashyap answers flatly,

Public markets have an aversion to companies that lose money on operational level and most of the consumer Internet companies will keep losing money. Loss-making businesses require major turnaround and it takes significant time. I believe that B2B companies will attain scale and profitability to stage IPOs before the turnaround takes place within B2C companies.

Challenges in IPO preparation

Besides raising capital on regular intervals, there are a number of other challenges that can impact prospects of potential exits. “Building the right kind of culture and organisation structure will be challenging for a company preparing for an IPO,” points out Alok. Superior consumer as well as merchant experience will be crucial factors for consumer-focussed companies gearing up to make their consumers buy a piece of the firm.

“Feedback of consumers as well as merchants/drivers on Flipkart, Snapdeal, and Ola are relatively weak when compared to global giants like Amazon and Uber. Apart from consumers, sellers/drivers appear to have more satisfactory review towards Amazon and Uber,” adds one of the industry analysts on condition of anonymity.

Will portfolio buyouts catch on?

Other than IPO and M&A, portfolio buyouts are also likely to be a form of exit for VCs. Last year, Canaan had sold out its entire portfolio to JP Morgan. Abhishek Goyal, CEO and Co-founder of Tracxn, says:

On Canaan lines, some investors will explore such exit strategies. At Tracxn, we see significant appetite from global investors in buying out mid-size VCs portfolio.

According to Abhishek, portfolio buyouts appear to be a strong medium to maintain liquidity.

The Chinese connection

Indian startups and their investors love to point to the successful listings in China. However, the Chinese market is far more mature than India. In fact, it is striking how Chinese investors we speak to repeatedly refer to how the Indian market today reminds them of the Chinese market seven to eight years ago. Approximately 350 million (7X more than India) shoppers are open to buy and avail services online in China. To put things in perspective, Alibaba had 279 million active customers (over $296 billion GMV) at the time of IPO, while JD.com had around 83 million active customers ($35 Billion GMV) at the time of public listing. On contrary, Flipkart and Snapdeal are claiming GMV of $10-12 billion each.

Besides, mega IPOs by Chinese companies have been supported by strong liquidity in global and domestic markets, with strong optimism in both. It remains to be seen if Indian companies will have the same luxury. 

China also saw some companies manage IPOs without a strong monetisation model, a definite no in the conservative Indian market. Xiaofeng Wang, a US-based analyst with Forrester, adds:

Alibaba, JD.com and Tencent, their business models are different, but they are the ones with clear monetization models. However, there are also other Chinese companies who don't have a clear monetization model, but more about potentials and possibilities of the idea. The latter type of IPOs are more risky, especially when global liquidity goes for a toss.

Xiaofeng's research focuses on how to better understand the unique social, mobile, and digital behaviour of Chinese consumers.

Is language a barrier for scale in Indian context?

Moreover, China has a uniform language across the country, whereas the language barrier is emerging as one of the biggest roadblocks to growth for consumer Internet companies in India. “As of now, growth of consumer Internet companies are largely driven by the English speaking population. But the real scale will come when Tier II and III cities start transacting online,” adds Satish.

Bringing non-English speaking people to transact online is time-consuming and will require lots of innovation. Companies like Snapdeal launched its mobile site in seven Indian languages. However, none of the other consumer Internet companies have bothered to emulate them. “Indian hinterlands are consuming content in Indic languages, but making them transact won’t be an easy task for consumer Internet companies,” adds Shailesh.

Unlike Shailesh, Abhishek does not see language as a barrier for two reasons. He says, “English speaking population is bound to catch on with millions of job creations over the next three to four years.” He also points out that translation (from English to multiple Indic languages) would be much easier with technological advancement in the next two years and so.

So far, this year is panning out as a reality check for startups irrespective of their size and funding they guzzled. Last year investors were driven by FOMO and thus we witnessed multiple deals in various mee-too startups without strong product market fit. Unlike 2015, this year investors are laying emphasis on sustainability, and demanding answers to fundamental questions like positive unit economics, road towards profitability et al. It will be a brave call to make, but we at YourStory believe that Indian entrepreneurs will find a way, thanks to an evolving consumer market and consolidation driven by investors. So can you have a respectable portfolio made entirely of web and mobile based businesses by 2020? Don’t rule it out.