Evolving Indian Startup Ecosystem: IPOs Become Viable Exit Routes for Investors

The Indian startup ecosystem has experienced significant evolution over the past decade, leading to major shifts in how private equity (PE) and venture capital (VC) firms strategize their exits from startups. Traditionally viewed as venues for established companies, Indian stock markets are now providing diverse opportunities for new-age startups to access public funding, offering lucrative exit options for early investors, including angel investors and venture capital firms.

The increase in exit activity through public markets underscores this transformation, which has profound implications for Indian PE-VC strategies. According to a report by Bain & Company, despite a slowdown in deal-making, 2023 has emerged as a landmark year for Indian exits, with exit value rising by 15% to USD 29 billion and exit volume increasing from 210 to 340 exits. Notably, public market sales, primarily through block trades, accounted for half of the total exit value.

Block Trades and New Exit Mechanisms Gaining Popularity

Block trades, which involve large transactions executed outside the open market, are becoming a favored exit mechanism for early-stage investors. However, industry experts note that while large corporate buyouts have historically dominated exits, MSME Initial Public Offerings (IPOs) and full-fledged IPOs are now emerging as more attractive routes for providing liquidity to startups.

Dhruv Dhanraj Bahl, Founder and Managing Partner of Eternal Capital, stated, “The age of mega-exits as a standalone option is coming to an end. This is now changing with the proliferation of MSME IPOs, the launch of the startup exchange, and aggressive corporate M&As.” He emphasized that these new structures, including block deals, are providing essential liquidity to the startup ecosystem, enabling investors to exit without the lengthy and costly process of public listings.

Retail Investor Participation and Market Maturity

Archana Jahagirdar, Founder and Managing Partner of Rukam Capital, highlighted the emergence of a new set of retail investors participating in public markets, who are more flexible and nimble in their investment strategies. She noted that this shift is altering the narrative around exits for startups, as PE and VC firms increasingly leverage block trades to realize returns before taking companies public.

Jitendra Kumar, MD of BIRAC, observed that India’s public markets have matured significantly, characterized by a broader investor base and deeper liquidity. Manish Goel, Founder and Managing Director of Equentis Wealth Advisory Services, attributed the growth of high-growth startups launching IPOs in Indian public markets to strong domestic demand, the digital economy’s role, and increased participation from retail investors.

To sustain the trend of IPOs as exit routes, VC players emphasize the need for continued evolution in market infrastructure and investor behavior. Jahagirdar pointed out that the depth and quality of companies listed will be crucial as India’s startup ecosystem continues to expand, driving investor interest in new technologies and innovative business models.

Appalla Saikiran, Founder and CEO of SCOPE, suggested that new exit models could emerge, such as direct listings that allow startups to go public without raising fresh capital. He also mentioned the potential for Special Purpose Acquisition Companies (SPACs) to gain traction in India, providing a niche for high-growth startups.

Rajeev Kalambi, General Partner at Cactus Partners, explained that non-IPO block and bulk trades are still in their infancy and are primarily limited to high-profile startups. He noted that these trades are typically facilitated by wealth management firms, private banking firms, and investment banks, resembling traditional banking or broking processes.

Kalambi also highlighted the emergence of secondary funds and tech-enabled secondary platforms that facilitate transactions for investors seeking liquidity.

Bain & Company’s report further emphasizes the strength of the Indian public markets, which have outperformed those of many major economies, showcasing a significant increase in domestic investor participation across various sectors and companies.