Indian stock markets have consistently rewarded founders, angel investors, venture capital, and private equity funds, but what about the general public? Are they fairly rewarded, or are they made a dumping ground for fundamentally and technically weak stocks?
Examining the market performance in recent years and the booming IPO market due to increased public participation may initially suggest a positive sentiment. However, this does not reflect the true picture.
Let's delve into the business cycle of a private company until the IPO stage.
Indian stock markets have consistently rewarded founders, angel investors, venture capital, and private equity funds, but what about the general public? Are they fairly rewarded, or are they made a dumping ground for fundamentally and technically weak stocks?
Examining the market performance in recent years and the booming IPO market due to increased public participation may initially suggest a positive sentiment. However, this does not reflect the true picture.
Let's delve into the business cycle of a private company until the IPO stage.
A business undergoes multiple stages before being listed on the exchange. Between inception and IPO, various key players come into play:
Angels: Individual investors with limited funds.
Venture Capital: Formalized institutions with significant capital, aiming to acquire controlling stakes in angel-backed companies.
Private Equity: Individuals and funds with substantial capital investing in startups that have already reached a certain level, focusing on maximum returns rather than equity stake, unlike VCs.
Merchant Banking: Part of the IPO process, these bankers assist private companies in getting listed on the exchange, handling document filings and meeting listing requirements.
Consider this analogy: imagine angel investors, venture capitalists, and private equity players as kings of the jungle, each with their own interests. However, they collaborate to lure a small animal like a deer. Working together, they create a situation that attracts the deer. Unaware of the setup, the deer falls into the trap and is ultimately killed.
Now, replace the deer with retail investors. This is the plight individual investors face when encountering an IPO listing. Without scrutinizing fundamentals and conducting thorough market analysis, they succumb to herd mentality and purchase an IPO.
Angels, venture capitalists, and private equity funds exit with substantial returns, often avoiding taxes. Unfortunately, this isn't an option available to the ordinary shareholder, who relies on market image and the sentiments of other shareholders.
Take the case of the Paytm IPO in 2022:
The stock plummeted from Rs 1947 per share, experiencing a 73% drop to Rs 514 in just 147 days. Allotted shareholders suffered significant losses, and as of today, the stock has failed to regain its IPO level price.
Reasons for such losses include high sentiments for Paytm's IPO and an inflated valuation of $19 million. Retail investors, investing based on brand name and sentiment, faced severe losses, while founders, VCs, and angels profited from the substantial exits.
Moral of the story: Always conduct industry and stock analysis before forming a strong opinion on any company. Only after thorough research and analysis should you buy shares; otherwise, you risk making poor financial decisions and blaming the stock market.
Angels, seed, VC, and PE funds are market players dominating the private market space, poised to continue growing. Ultimately, it is the common investor with no knowledge of the space who becomes a scapegoat. The only way to avoid this is through financially sound decisions and consulting experts before dealing in the public markets.
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