It’s on Tuesday morning. 15 May. While the entire nation has its eyes glued to news channels, waiting for the outcome of the Karnataka elections, there is a listing ceremony going on in the NSE auditorium in Mumbai. On the face of it, there’s nothing exceptional about it.
E2E Networks, a Haryana-based cloud computing startup, gets listed on the NSE Emerge platform, becoming the second venture capital-backed company to do so this month. The first, Pune-based SoftTech Engineers, a software company that caters to the architecture, engineering, and construction (AEC) verticals, was listed on 11 May.
The public listing of the firms
In the midst of commotion caused by Walmart’s acquisition of Flipkart and the state election in Karnataka, the story of these two small-ticket initial public offerings (IPOs) didn’t get much attention. The public listing of E2E and SoftTech, each with an issue size of around Rs 22 crore (~$3.23 million), were infinitesimally small relative to Flipkart’s Rs 100,000 crore (~$16 billion) deal but they are probably just as important to the Indian startup ecosystem.
These listings, the first of their kind, are a harbinger of a new kind of startup exit.
The small and medium enterprises (SME) exchange is a dedicated platform that allows the listing of small and medium companies who, otherwise, find it difficult to get listed on India’s main exchanges— the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). The stringent rules set by the market regulator Sebi for public listings in India makes it impossible for SMEs to have an IPO. As a solution, Sebi introduced two platforms on BSE and NSE in 2012, called BSE SME and Emerge, respectively. Both of them are tailor-made for the listing of SMEs, with relaxed norms in terms of net-worth and profitability requirements.
E2E and Softech are exceptions. “While the number of IPOs has grown on these SME platforms, none of them have been venture-backed, and last week, we had two companies who managed to go public,” said Arun Natarajan, founder of Venture Intelligence. “This is significant as it is a very welcome alternative route for exits and liquidity to the investors, and to some extent, to the founders.”
But exactly how significant is it? E2E’s IPO got oversubscribed 70X, and against an issue price of Rs 57/share ($0.84), the stock listed at Rs 85/share ($1.25) on 15 May—a 56.5% listing gain. This hasn’t gone unnoticed. The chatter is that many VCs and startup founders are looking at these platforms as an alternative route for exits and raising capital. “You need one entrepreneur, one firm to drive something like this. It really shows that fantastic value can be created on these exchanges and the fact that it was oversubscribed shows a lot of confidence,” says Sasha Mirchandani, Managing Director and Founder of Kae Capital.
The cut-off
It’s important to note that public offerings of tech startups are hard to come by in India. But getting tech companies to list in India has been an idea in the works for a while. Sebi had come up with the institutional trading platform (ITP), which was supposed to be a window to the exchanges where biotech, e-commerce, and other tech-based startups could list.
But it didn’t fly.
Sebi had made sure that only institutional investors and high net-worth individuals (HNIs) could invest in startups through the ITP route. The minimum application requirement for participation in these IPOs was set at Rs 10 lakh (~$14,665) ensuring that retail investors didn’t get to participate in them. Needless to say, it proved to be a non-starter. ITP failed in providing Indian promoters and private equity investors an option to exit from startups through public offerings.
“It has been tough for early VCs to get exits in India, even if we were getting some exits, the quantum was not big enough and the big ones were few and far between,” says Ashish Fafadia, CFO, Blume Ventures. “Until 2015, local players were still in the zone where they were doing a ‘make’ vs ‘buy’ decision, hence exits through acquisitions from big domestic firms were hard to come by,” he adds.