Piyush Gupta is a managing director in Sequoia Capital India’s strategic development team, which helps raise private capital, do IPOs and conduct M&As. This post originally appeared as an article on Sequoia’s website and has been reproduced here with permission.
India is among the world’s most vibrant startup hubs, led by its exemplary tech talent, entrepreneurial zeal, and innovation-friendly government policies.
Many successful startups are at the forefront of driving massive tech transformation in India, as well as job creation. And many of them are building products and services that are competing globally.
As Indian startups grow in scale and size, their need to access deeper and more diversified pools of capital increases. Currently, the legal framework in India doesn’t allow Indian unlisted companies to raise capital by listing on an overseas stock exchange. Lack of access to wider, global pools of public capital will impede the growth ambitions of many startups.
For example, the total market capitalization of all the companies listed in India is approximately $3 trillion while that comparable number for the US is $49 trillion. As a result, many Indian startups do not have a level playing field with their counterparts in other global startup hubs.
If India wants to produce and compete with global enterprises like Google, Amazon, Alibaba, giving our start-ups the ability to access the public markets that suit them best is critical.
For most Indian startups, the home market still has many inherent advantages and many founders would still choose to list in India. Only startups in certain sectors or with certain characteristics will benefit from accessing international public markets.
As the Government of India continues to consider new regulations and as the US SPAC market develops and hunts for suitable Indian startups, many founders are already starting to weigh the pros and cons of a listing in the US versus India.
Drawing on 17 years of experience as a regional Technology, Media, and Telecommunications (TMT) banker covering Asia Pacific and helping a dozen-plus companies go public on different exchanges, including the BSE/NSE, HKeX, SGX and Nasdaq/NYSE, I’ve pulled together a framework that founders, shareholders and boards can use to choose the best listing venue for their startup.
The home field advantage: the pros of listing in India
Here’s three pivotal reasons to list on BSE and NSE.
There is comfort in listing in a home market
It’s an operating environment Indian founders already know. Auditors know the required accounting standards under SEBI, there are plenty of good lawyers who can draft your prospectus, many good banks that can craft your equity story and market it to investors; and enough investors that can price your stock.
The post-IPO process is straightforward
Meeting the required quarterly and annual disclosures will be straightforward as your team and professional advisors will know how to help you get there; there will be plenty of research houses that will pick up coverage of your company and publish forecasts; and lots of investors will interact with you through the year.
Valuations are sometimes richer
Consumer product companies in India enjoy some of the highest valuation multiples in the world, even at moderate growth rates. You only have to look at the much higher valuations of Indian FMCG companies, food and beverage companies, and paints companies enjoy vs their global counterparts.
The same also holds true for financial services companies. The leading Indian banks and NBFCs are trading at significant premiums to the valuations of their global peers. So if you’re the founder of a consumer product or a financial services startup, the choice is really easy; it wouldn’t make sense for you to forego the comfort of home market environment combined with the best valuations.
The valuation of some of India’s new economy tech companies are also probably better than what they might achieve in international markets. Whether it’s Infoedge, Indiamart, Affle, RouteMobile, or Reliance, which has the JIO Platforms premium embedded in it, the valuations are punchy.
This is likely due to the ‘scarcity premium’ that is being applied to these companies; any investor wanting exposure to the India new economy can only play it through this very small set of companies.
So for a lot of new tech businesses that have moderate growth, profitability and business models can be understood by domestic investors, and India listing is the best bet too.
When a US listing makes sense
There are a few circumstances where an Indian startup might be better served by going beyond the comfort of their home shores.
Listing in the US makes sense if:
Your customers are primarily overseas
Software/SaaS companies with US customers, for example, will benefit from listing in the US. Being listed on the NYSE or NASDAQ establishes a US face to your brand and helps underscore that the company conforms to high governance and transparency standards. This can be very valuable for companies building a global business with deep roots in the US market. Infosys, Wipro, WNS and Genpact followed this playbook, leveraging a US listing to increase brand recognition and ease of doing business in their target market.
Your startup operates in a sector where US investors and analysts have developed deep sectoral expertise
It makes a strong difference when research analysts or investors know how your business works, understand the key metrics to measure your business by, and know what the comparative metrics are for top performing companies in that sector globally. The number of companies from certain sectors listed in the US have hit a critical mass, creating a deep knowledge pool that makes US an attractive listing venue for other companies in the same neighborhood. This includes:
- E-commerce: Market leaders from all around the world, including Amazon, Alibaba, JD.com, Pinduoduo, Farfetch, Mercado Libre, SEA and Ozon, are all listed in the US.
- Software/SaaS: The majority of global software companies are listed in the US, which is also the largest consumer of enterprise software.
- Payments: The presence of various payments and fintech business models like Mastercard, Visa, Paypal, Square, Fiserv, Affirm, SoFi, Pag Seguero and Stone.
You are in a sector which is very cutting edge or futuristic
Investors in US equity markets seek growth and are sometimes willing to make bets on unproven business in very cutting-edge sectors. As a result, US markets have become the go-to home base for a number of innovation-driven categories, such as biotech companies and electric vehicle-related technology companies.
You have a very large/global business that needs a deep capital pool
US capital markets are much deeper than Indian markets. The total market cap of listed companies in the US is more than 16 times that of India (US is $49T and India is just below $3T). There are 20 times more companies with over $15B in market cap in US compared to India. In 2020, $450B in capital was raised in the US from both IPOs & follow-on offerings vs $30B in India.
Other factors that may tip the balance
Whether or not you plan to use your stock as acquisition currency, or use your stock liberally to attract global talent
Indian stocks may not be freely tradeable for investors outside India due to various regulatory restrictions. US stocks, on the other hand, can be bought or sold freely by investors around the world, and there are no constraints on raising debt for M&A. The recent Microsoft-Linkedin and Salesforce-Slack acquisitions illustrate how companies whose shares are listed in liquid markets can craft acquisition deals with substantial stock components. Also, if you want to build a global business and attract global talent, having an international listing creates a better profile.
The ease of listing
A) Direct retail investor participation in India in IPOs is way higher than the US. Therefore, SEBI’s rules are designed to protect the small investors. US stock markets on the other hands are characterized by a higher degree of institutionalized participation. As a result, the SEC takes more of a ‘buyer beware’ approach – which makes it easier for companies. This manifests in many different ways, such as:
- A three-year lock-in for 20% of the Company’s shares by its Founders + 1 year lock in for all other pre-IPO shares. In the case of US IPOs, there is a 6 months customary lock in and flexibility for early releases if stock trades materially up
- Prescriptive prospectus disclosures in India, including detailed asks around Capital History, Use of Proceeds, Outstanding Litigation etc. vs a materiality-based disclosure approach in the US.
- India’s IPO allocations are based on pre-determined formula and constraints your choice of anchor investors. In the US, the company and underwriters are free to choose their IPO investors.
- We could fill a page on other differences that result from these different regulatory mandates, though SEBI has been making some significant rule changes gradually to narrow the gap.
B) US stock markets, which are larger, deeper and have a higher velocity of IPOs and new issuances, have a more predictable, institutionalized framework. IPOs and follow-ons are clockwork. It’s like a well-scripted play where everyone knows their part and has rehearsed their lines.
C) In Indian IPOs, the draft red herring prospectus (DRHP) with SEBI is made available to the public immediately whereas in the US, SEC filings are allowed to be confidential until the very last moment when the company is ready for IPO launch – stealth and confidentiality from competitors is useful in the startup world
Access to SPACs/ Direct Listings/ Other options within the capital structure
If, as a company, you plan to use a SPAC, Direct Listing, or plan to use the full spectrum of capital structure options later on such as issuing publicly traded Debt (Bonds), Convertible bonds and other issuances, it’s important to note that while these are well established in the US they’re nascent or non-existent in India.
During the early weeks of coronavirus impact, companies such as Booking.com and Expedia were bolstering their balance sheets with convertible bonds as investors sought some floor protection on their new capital.
Apple, Microsoft regularly issue bonds to conduct buy backs and optimize capital structures to deliver shareholder returns. Think carefully about whether you’ll want to have these options available to you.
US is generally a more litigious environment. It is much more common to hear about attempts to launch class action lawsuits when the stock price drops of a company listed in the US vs that happening in India.
In conclusion, I believe that out of every 10 startup IPOs, seven to eight will be in India for all the advantages it offers, but there will be two to three companies who will be served better be going overseas. If the GOI regulations remove the current barriers to offer genuine listing choice to startups, this is likely to unleash a very exciting phase in startup funding, and its downstream impact on employment generation and GDP growth.