Startup IPOs: Investors rush for exits as new capital takes a backseat

Zomato, however, was among few outliers in that breakthrough year for startup IPOs in India. In most other such public issues, the IPO has been the most favoured exit route for startup investors looking to harvest the faith they had placed in an emerging company.

In all, in 2021-22, offers-for-sale by investors accounted for 48% of the total startup IPO share sales by value, against 63.3% in the broader IPO market. In FY25 so far, until 4 October, offers-for-sale by investors have accounted for 64% of startup IPO share sales—the highest in four years—against 51.21% in the overall IPO market.

A primary reason for this is that several fund managers backing startups are at the end of their fund lifecycle, which means they need to sell substantial stakes in IPOs so they can return money to their investors.

While this means startups raise less capital from IPOs to fuel their growth, it leaves more money on the table for new investors looking to ride the startup wave as India’s stock market scales record highs.

“The OFS component will continue being higher as the fresh capital which companies are seeking for their growth has already significantly come in through PE/VCs (private equity and venture capital firms)," said Pranav Haldea, managing director of Prime Database.

Honasa Consumer Pvt. Ltd (Mamaearth), Go Digit General Insurance Ltd, Awfis Space Solutions Ltd, Le Travenues Technology Ltd (Ixigo), and Brainbees Solutions Ltd (FirstCry)—which went public over the past year—had a higher proportion of OFS as compared to fresh capital issues, NSE data show.

Swiggy, expected to go public shortly, will also have a higher OFS component—of ₹6,664 crore—versus a fresh issue component, of ₹5,500 crore, as per its draft red herring prospectus, the IPO document.

Repaying investors

The pattern of increasing offers-for-sale in startup IPOs indicates an investor scramble for exits and generating liquidity, which they have been executing also through pre-IPO share sales to other investors in so-called secondary transactions.

With several fund managers at the end of their fund life, investors and bankers point out that OFS becomes a crucial tool to generate liquidity by selling part stakes in portfolio companies to return capital to their limited partners, or investors in PE and VC funds.

Investor exits from startups in India surged by almost 1.7x to reach $6.6 billion in 2023 as they sought to provide liquidity to their LPs in a high-interest-rate environment, according to Bain’s venture capital report in March.

Secondary and strategic sales to other investors have also increased in value, primarily driven by mega-exits in consumer-tech companies such as Flipkart and Lenskart, according to Bain’s report.

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In the current financial year, startups have raised ₹5,385 crore in OFS and ₹3,039 crore of fresh capital, according to data from Prime Database. Of the eight startups that have gone public since September 2023, five had a higher OFS component.

In FY24, Indian startups raised ₹1,359 crore via fresh issue of shares in IPOs, versus ₹1,681 crore raised from offers-for-sale by investors.

In FY22, startups raised fresh capital of ₹21,680 crore as compared to an OFS component of ₹21,146 crore. Easy Trip Planners Ltd (EasyMyTrip), Nazara Technologies Ltd, and Cartrade Tech Ltd that went public in 2021 had nil fresh capital issues as their IPOs were largely meant to give their early investors an exit.

Unicommerce eSolutions Ltd followed a similar strategy when it tapped the public markets in August this year.

While companies typically issue IPOs to raise capital for growth or to repay debt, “in the case of startups, where investors have invested for close to a decade and are nearing their fund lifecycle, there is a requirement for an OFS, at least a partial sale of shares, for these investors to realize liquidity," said Aakash Agrawal, associate director-digital and new-age business, Anand Rathi Investment Banking.

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A ‘new’ old playbook

Companies that went public in the 1990s hardly had an OFS component and were 100% centred around fresh capital issues. Those companies issued IPOs largely to raise capital for business expansion as there were not many other alternatives available at the time in India.

This changed as alternative investment funds—private equity firms, venture capital funds, and angel investors—filled that space, enabling companies to raise funds in private markets at rich valuations.

This risk-growth capital helped many startups reach a certain scale with proper governance mechanisms, Haldea said, adding that only after multiple rounds of investments from such investors are companies approaching the public market.

But in the broader IPO market, the OFS component is showing signs of normalizing as companies understand that they need to leave enough wealth on the table to reward public investors, and allow room for for their investments to appreciate, said Karthik Reddy, co-founder of venture capital firm Blume Ventures.

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In FY24, offers-for-sale accounted for about 53.45% of the total IPO share sale—the lowest in eight years—down from 73% in FY23, data from Prime Database showed. In FY25 until 4 October, as stated earlier, the figure is at 51.21%.

The IPOs of Inox Green Energy Services Ltd, Flair Writing Industries Ltd, Kross Ltd, and Bajaj Housing Finance Ltd, which went public in the last two years, saw an almost equal split of offers-for-sale and fresh capital issue components.

Reddy expects a similar normalization even in startup IPOs.

“This is a good shift for the overall ecosystem as it is moving from private investors to public institutions such as mutual funds," he said. “I expect most private venture-backed companies… to eventually have a 50-50 split of OFS and fresh capital issue, and this is going to be the playbook for the rest of the decade."