When They Get Listed, Startups Have To Learn Two New Terms: Governance and Profitability
A few days ago, online food delivery platform Zomato acquired quick-commerce grocery delivery platform Blinkit (earlier Grofers) for Rs4,447 crore (about US$568mn—million), in an all-stock deal. The deal has raised many eyebrows. For one, Zomato has just about Rs1,250 crore on its balance sheet and is badly haemorrhaging, losing Rs750 crore of cash from its operations, in 2021-22 alone. Second, the acquisition comes at a time when Zomato’s own future is cloudy. Last year, it reported a loss of almost Rs1,100 crore and, under the current business model, there is no chance that it will make a profit soon. If so, its own existence is in doubt, unless it can find new cash to carry on. Third, there are various conflicts of interest in the Blinkit deal. 
 
It appears that the chief executive officer (CEO) of Blinkit, Albinder Dhindsa, is an ex-chief financial officer (CFO) of Zomato and spouse of Zomato co-founder, Akriti Chopra. Zomato owned more than a 9% equity in Blinkit.
 
Zomato founder and CEO Deepinder Goyal was himself a 10% shareholder of Blinkit until last year, before selling it to Tiger Global. Finally, the valuation seems to be based on just two months of unaudited results, when even a small-time valuer insists on audited results to even start the valuation work.
 
Now, none of this would matter if Zomato were unlisted. Unlisted companies are free to do what their boards agree with—invest in loss-making companies where they see competitive advantages or continue with a business model where they lose boatloads of money. They are judged by metrics, that their private equity investors set for them—the main one being customer acquisition and revenue growth at any cost. 
 
The fixation with growth is so overpowering that some over-ambitious founders and their backers have even been known to fudge their books. The end objective is to somehow grow the business to a certain size so that it can be publicly listed. In that process, charismatic founders, creating 10x growth while losing money like water, get an easy pass.
 
Consider this story of unlisted Ola. According to a report by Moneycontrol, between December 2018 and January 2019, Bhavish Aggarwal, founder and CEO of Ola, purchased a 92.5% stake in Ola Electric for Rs92,500 or US$1,500. The rest was held by Ola in return for permitting the use of its brand name. 
 
A month later, Ola Electric raised Rs300 crore (US$42.2 million) from Matrix Partners, Ratan Tata and Tiger Global at an undisclosed valuation. Five months later, in July, Ola Electric announced that it had raised US$250mn from SoftBank at a valuation of US$1bn (billion), the fastest unicorn in India. 
 
Today, both Ola and Ola Electric are valued at about $5bn, following the launch of electric scooters. Mr Aggarwal owns 5% of Ola but about 32% of Ola Electric. 
 
One may wonder why Ola investors allowed Mr Aggarwal to walk away with such a large stake in Ola Electric. But then, it is their internal matter. The point is, if Ola were publicly listed, this would have been seen as brazen self-dealing by Mr Aggarwal. 
 
Unfortunately, start-up founders do not seem mindful of the fact that, once listed, every corporate action will be judged from the point of view of its fairness to retail or minority shareholders. 
 
As in the case of Ola and Zomato, self-dealing starts with the structure of ownership. 
 
Take the case of Paytm, which got listed last year, in which founder Vijay Shekhar Sharma holds around 15%. He also holds 51% of Paytm Payments Bank, which is unlisted. Paytm pays Rs900 crore annually to the unlisted Paytm Payments Bank, majority-owned by the founder. It is one of the best examples of conflict of interest and self-serving related-party transactions. Again, this would have been up to the investors of the two entities when they were both unlisted. Since Paytm is listed, such conflicts have to be resolved. 
 
The second source of self-dealing in start-ups is their scandalous pricing of initial public offering (IPO). As long as they are unlisted, the valuation of start-ups is completely driven by an approach that can be characterised by ‘growth at any cost’. 
 
In the la-la land inhabited by visionary founders, backed by deep-pocketed adventurous investors, it is alright for a Blinkit to lose Rs637 crore to earn a revenue of Rs177 crore, because they would ultimately dump it on the public market. When they do their IPOs, start-ups continue to value their business as if it is another round of mad-money fund-raising. 
 
This is why Paytm, the largest-ever IPO in the Indian markets, priced at Rs2,150 a share, opened for trading 9% down on 18th November. It then dropped vertically, ending the day 27.6% down at the lower circuit. A few days after the issue, the chief financial officer (CFO) of Paytm claimed, “We could have priced the IPO much higher but we decided not to. We wanted to leave value for investors.” 
 
Last Friday, it closed at Rs657, down 70% from the issue price. As I said, it was another round of mad-money for Paytm and the CFO perhaps expected the price to soar further.
 
Start-ups do not care that mad-money funding comes to a hard stop after an IPO. Shareholders of listed companies believe in a different approach to valuation; it must be based on profitability and cash-flows, and all eyes will be on corporate governance standards. As a listed entity, corporate actions have to take the interests of all shareholders into account, especially minority shareholders. So far, we are not seeing any sign of it. 
 
Comments
balakrishnanr
4 weeks ago
This is where SEBI/MCA have to step in. But then, they will not, because the law has been framed in such a way that promoters can do what they want, with minimal formalities. Just getting some forms filled and everything becomes legal. And with e-voting, there is NO debate. How delightful
Darbha Srinivas
1 month ago
Very interesting and useful article about how people who have high reputation think and act.
ASHISH MAHESHWARI
1 month ago
Most of these start ups are huge wealth creators for their founders and early hires plus select top management. Additionally these companies don’t bother about profitability they have also distorted job market by paying huge salaries which companies with profitability targets couldn’t match.

Unfortunately for these start ups, now the skeletons are coming out of the closet and future dumping of shares to retail in IPO won’t be this easy (unless VC’s friends in MF industry help them out, as was seen in few IPOs).
saharaaj
1 month ago
they have to register with local mafia /political parties Police stations, ED and IT
Vivek Shah
1 month ago
Unfortunately it's because of this heady start-up valuations that the government is thinking of re-introducing regulations similiar to that of the defunct and outdated authority called Controller of capital Issues which use to fix the issue price prior to the liberation of the capital markets. This would surely be a regressive step and should be stopped at all costs.
Sejal
Replied to Vivek Shah comment 1 month ago
Agree 100 percent. More govt usually leads to more regulations. IPO is not forced on anyone. Retail investors purchased out of their own greed.
Khattarmd
1 month ago
How the investing public is mesmerised to buy such highly priced IPO and how fast the value depreciates are the Questions to be answered . Of late the loss making companies are somehow get a huge valuation and go for IPO . Is these No body responsible for giving this high valuation? Is no intervention required
sha79
1 month ago
Excellent article. Moneylife published honest reviews of the IPOs of these hyped up companies. However many retail investors fell for the hype and ended up buying these hot issues at inflated prices. Please publish more articles like this.
C V MANIAN
1 month ago
Start ups like Ola, Zomato , etc., are fraud which have been swindling naive investors. From the beginning they have been running at a loss and still continue to lose money. As mentioned in your last paragraph, governance and profitability are the main criteria by which successful entrepreneurs are measured. Everything else is cheating the gullible investors.
yerramr
1 month ago
Very practical and useful insight for growing startups, not just in India but elsewhere too.
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