According to the Wednesday filing, Zomato had 161,637 active delivery partners and 350,174 active restaurant listings.

The upcoming initial public offering (IPO) by India’s first online food delivery company Zomato — erstwhile Foodiebay.com and one of India’s most successful internet stories in the past decade — will be more than just a major listing event for the young Indian startup ecosystem. Valued at $5.4 billion — higher than around the $5-billion valuation of its arch-rival Swiggy — Zomato would most likely turn sentiments of investors and startups towards the local ecosystem of capital raising and exits if it pulls off a successful IPO. The 12-year-old startup, backed by Info Edge, Tiger Global, Ant Financial, etc., and present in 24 countries, is aiming to raise Rs 8,250 crore ($1.1 billion), according to the draft red herring prospectus filed with the Securities and Exchange Board of India (SEBI) on Wednesday. So, what all is riding on a successful Zomato IPO?

Driving Sentiments

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The event would be a “very, very, very big development for the startup ecosystem so far as despite having a good regulatory regime, many startups were not tapping into Indian capital markets which is highly liquid. Whatever money you can raise outside India, you can raise in India because the same investors are investing in India. The market rewards growth and the fear that without profit they will not be recognised, is unfounded. This will be a blockbuster as Info Edge has already demonstrated how markets reward growth,” TV Mohandas Pai, Chairman, Manipal Global Education told Financial Express Online.

Zomato didn’t reply to the request for comments for this story.

The Zomato IPO will be among a handful of startups domiciled in India including Policybazaar, Nykaa, Delhivery, MobiKwik, etc., planning to list in the coming months. A successful listing is also likely to pump up a number of other internet-first or internet-only startups to opt for listing to raise further capital even as successful listings IndiaMart, and Infibeam in the recent past have sent positive signals with respect to India-focused investors’ appetite for internet stocks. So far, the amount raised by Zomato stood at $2.1 billion, as per Crunchbase, and had achieved the unicorn status back in 2015-16.

“This IPO in some ways will be very defining. Startups have not been thinking of IPO as a real option. Zomato’s would be a sort of first mainstream startup IPO followed by seven-eight startups looking to go public. Even if half of them are able to list successfully, then going for IPO will become a mainstream option for Indian startups. But if they fail, it will also set a trend for startups not wanting to go for IPO. So, it is a big defining moment for the startup world,” Abhishek Goyal, Co-founder, Tracxn told Financial Express Online.

A successful IPO would also matter a lot for lakhs of micro and small restaurants listed on Zomato. According to the Wednesday filing, the company had 161,637 active delivery partners and 350,174 active restaurant listings including 132,769 restaurants that actively delivered orders. Zomato disclosed $183.6 million in revenue for the period April-December 2020 while losses stood at $91.8 million during the period. Importantly, the company noted that it had a “history” of net losses and expected increased expenses ahead.

“It will be a very big step forward for SMEs in the restaurant sector as well since Zomato is an integral part of the sector. Moreover, during Covid, food delivery has been the means for survival for the food industry and Zomato has been one of the pioneers in this space. As partners, we are happy for this IPO but when it comes to restaurants and aggregators, it is a love-hate relationship. Aggregators are very important but at the same time we need to find the right balance of working as partners with companies like Zomato which I think is a work in progress. I am confident it will be a blockbuster IPO,” Sagar Daryani, Co-founder and CEO, Wow! Momo told Financial Express Online.

Restaurants in the past had scuffled with Zomato over the latter’s Gold package in 2019 that according to restaurants had impacted their sales. The company and restaurants were at loggerheads again earlier this month over the order rejection or cancellation policy of the company. Nonetheless, if Zomato’s IPO succeeds, lakhs of these restaurants are also expected to benefit. “They are raising $1.1 billion capital which is a small amount of money out of which 40-50 per cent will be pre-sold. So, IPO will be small maybe around Rs 2k-3k crore. If IPO is oversubscribed 40-50 times, then it means there is a great unmet demand,” added Pai.

Moreover, the first lot of startups going public are likely to command a premium value as expectations from internet companies have been higher and investors would be ready to experiment a bit while consequently, it might help towards the overall response that startups get. “Their performance will determine if the excitement was worth it and it will set the path for next tech IPOs. People have been expecting tech companies to grow a lot after witnessing the growth of IndiaMart and Naukri.com which proved that tech companies can continue to grow consistently. So, the market expectation is high. Historically tech companies in the US have usually outperformed the rest and the same will be expected to happen in India as well,” added Goyal.

Listing during Covid

Timing too has been apt for Zomato to plan its listing as market sentiments are high. Nifty has been hovering near 15,000 while Sensex has been rallying to once again breach the 50,000-mark. When market multiples are high, investors are open to investing more, and demand for smaller companies is significant. The tech IPOs would have been much harder to execute two years back unlike now. Moreover, foodtech has been among few sectors that have benefitted from the Covid pandemic as people have shifted to online ordering of food and food items instead of offline purchases. “Public markets are doing well and there is bullishness. It is a good time to list,” Utkarsh Sinha, Managing Director, Bexley Advisors told Financial Express Online.

“If companies are involved with customers’ life, they will make a blockbuster IPO. Food is something which has a very emotional connect with people,” added Daryani. Most importantly, the IPO will boost the confidence of investors — both general partners and limited partners as India has been notoriously known for being unable to return enough of investors’ money to retain their confidence due to lack of large exits.

VC exits had declined 70 per cent to $1.3 billion in 2020 from $4.4 billion in 2019, according to India Venture Capital Report 2021 by Bain & Company and IVCA. Muted exits were driven by the impact of the pandemic on businesses, potentially reducing their valuations and hence making it an unfavourable time for investors to cash in on their investments. Sector-wise, one-third of exits were reported in edtech segment while around 20 per cent came from foodtech. However, the exit momentum is expected to improve over the next one to two years as most of the top VC funds’ portfolio is yet to reach maturity. The notable exits in 2020 included Byju’s acquisition of WhiteHat Jr. with around $300 million exit value and around $220 million in the secondary sale at Swiggy that gave exit to Elevation, Accel, Norwest Partners, RB Investments, and Bessemer. According to Zomato’s filing, its early investor Info Edge will sell its stake worth Rs 750 crore in the IPO.

“Zomato’s IPO will be the litmus test for investor exits and could pave the way for unicorn listings if it goes well. Investors will be watching keenly both to see if the IPO is oversubscribed and whether it pops and maintains its value post trading commences. Zomato’s listing will give exits to funds of various vintages and boost confidence in the Indian VC landscape, which should help not just the Zomato investors when raising their next funds, but others too when they hit the road,” said Sinha.

Lastly, a successful listing in India is likely to trigger more internet startups to explore local listings instead of listing in the US or Singapore or shifting base for a relatively easier regulatory environment. “IT services companies like TCS, Wipro, Infosys, HCL had a majority of their businesses outside India but they are based in India. So Zomato is breaking this flawed thinking of shifting abroad to raise more money and better valuation,” added Pai.

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