RBI suggests startups to convert 'innovative ideas' into breakeven, profits

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SME Times News Bureau | 18 Aug, 2021
At a time when startups and new-age companies are garnering huge investor interest along with robust responses for IPOs, the Reserve Bank of India (RBI) has said that the interest will sustain only if the companies are able to breakeven, increase cash flow and turn profitable.

In its Bulletin for August, RBI has lauded the recent IPOs of tech-based companies such as Zomato which received enthusiastic investor interest and said that 2021 could well turn out to be India's year of the initial public offering (IPO).

Debut offerings by Indian unicorns -- unlisted start-ups -- kicked off by a food delivery app's stellar IPO that was oversubscribed 38 times, have set domestic stock markets on fire and global investors in a frenzy.

"Yet, this explosion of interest in these companies will only be sustained if they are able to convert innovative ideas into metrics such as breaking even at the level of earnings before interest, taxes, depreciation and amortisation (EBITDA) level without expensing business development costs, followed by cash flows and profits," it said.

Expanded and dynamic exploitation of innate advantages such as data and logistics will be essential to live up to investors' starry-eyed expectations, as per the Bulletin.

"The jury is still out. Investors will closely scrutinise their stories. Analysts will put it down to stock markets' idiosyncratic behaviour, investors' greed and bandwagon effects, including myopic pursuit of listing day gains."

It noted that there are already warnings of systemic risks to financial stability that monetary policy authorities should not ignore as the unicorn IPO party gets going.

The bursting of the dotcom bubble in 2001 showed that many startups could go bust, but risk management practices have changed to diffuse this risk over many newcomers, it said, adding that, those that survive can go on to become the Googles, Facebooks and Amazons of the future.

The RBI report also noted that IPOs of new age companies arrive as bullishness about India mounts, especially around Indian tech

"These listings coincide with a broader rush by Indian companies to tap the market and the fomo (fear of missing out) factor driving investors, which have taken the benchmark indices to records."

It is estimated that India has 100 unicorns, with 10 new ones created in 2019, 13 in 2020 in spite of the pandemic and 3 a month in 2021 so far, it added.