Innovators Growth Platform can increase Indian capital availability significantly & address issue of listing

December 30, 2020 5:38 AM

The IGP as a platform has the promise to increase Indian capital availability significantly and address the key issue of listing. It has the added advantage of enabling exits for early-stage investors

As in the case of investments in the AIF, the platform is selective about its investors.As in the case of investments in the AIF, the platform is selective about its investors.

By Naganand Doraswamy

Two Cs are extremely critical for start-ups: ‘capital’ and ‘customers’. In India, with a population of 1.3 billion, customers for B2C or B2B2C start-ups is not an issue. For B2B start-ups, although the market in India is promising, global markets are still very important. Capital, on the other hand, is trickier. The total capital raised by start-ups in India from 2010 to 2020 is around $100 billion. In the same period, start-ups in China have raised 4x and start-ups in the US have raised 10x the capital raised by start-ups in India. India needs to have a stronger mechanism to enable more capital. There is a need to increase capital availability in India.

The Innovators Growth Platform (IGP) platform proposed by SEBI is a very refreshing initiative that aims to address the ‘capital’ issue. It provides another great avenue for start-ups looking to raise series B and beyond. This platform can double the available capital over the next five years. It addresses a key pain-point of capital availability for start-ups raising between Rs 70 crore and Rs 200 crore. There is a chasm in this space—there are early-stage VC funds and there are PE funds for growth companies. However, there are not enough growth stage VC funds in India to fill this gap. The IGP has the potential to be the platform to fill this void.

The design of the IGP has been very thoughtful with the key focus on technology start-ups. The precursor to the IGP was the Institutional Trading Platform (ITP). Due to various reasons, including maturity of the start-up ecosystem, the response to this platform was tepid. The IGP addresses a few key pitfalls of the ITP.

The IGP restricts the listing to technology-focused companies with a proven ‘product market fit’ and entering the growth phase. The revenue of companies listing on this platform is expected to exceed Rs 50 crore. This greatly helps in mitigating the risk of listing by ensuring a good understanding of ‘product market fit’ beforehand.

The governance issues are well-balanced—protecting investor interests but at the same time providing enough flexibility for the founders to have control over strategy and execution. Companies listing on this platform cannot be burdened with the same rules of public markets as they need to be very nimble. A balance between taking risks and moving fast with financial discipline as against governance practices such as quarterly reporting and stability is advised.
As in the case of investments in the AIF, the platform is selective about its investors. Companies listing on this platform need to operate as start-ups and not as mature firms. The risks are much greater with these companies and hence it is critical to have investors who understand these risks and who can understand these nuances.

Mergers and acquisitions (M&As) have been a key hurdle for start-ups in India. This is one of the key reasons for companies opting to flip and move their operations out of India. The platform is designed to simplify the process of M&As, post-listing. Simplifying the M&A process encourages corporates and PEs to participate on the platform. However, this spirit should be maintained in the implementation of the platform as well. This is one of the critical success factors for the platform.

For the Indian start-up ecosystem to become one of the major contributors to the economy, key policy changes are needed. iSPIRT had published a Stay-In-India checklist and so have other industry bodies. These include Indian Capital, Listing in India (IPO), and Ease of Business. The sentiment and perception of investors and corporates outside of India needs significant change. Improvements in all these aspects are critical. India needs more initiatives such as Fund-of-Funds (which has had a very meaningful impact on Indian capital by spurring early-stage funds such as Ideaspring Capital). India is now home to more than 400 venture firms. The IGP holds the promise on listing in India. There is an urgent need for such initiatives for ‘ease of business’.

The IGP as a platform has the promise to increase Indian capital availability significantly and address the key issue of listing. It has the added advantage of enabling exits for early-stage investors. This increases liquidity in the market that will further spur the start-up ecosystem—a much-needed virtuous cycle.

The NASDAQ encouraged and enabled technology start-ups to list because of its adaptability and easier listing and governance guidelines. This accelerated technology start-ups in the US. The IGP has the potential to be that platform in India. India can build products for the world and has the potential to become the start-up capital. It needs a perfect storm of two Cs (‘capital’ and ‘customers’), liquidity, policy and entrepreneurs. The IGP certainly has the promise to address the capital and liquidity aspects. Most importantly, it enables Indian start-ups to Stay-In-India!

The author is founder & managing partner, Ideaspring Capital, and a volunteer at iSPIRT

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