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Why Zomato IPO is cause for celebration

Unicorns – unlisted startups with a private value of a billion dollars or more – are exploding in numbers and entering the marketplace. Zomato, India’s largest grocery delivery company, has just issued shares to the public and has been massively oversubscribed. The issue price valued the company at $ 8 billion (Rs. 60,000 billion), and the price will rise much higher at the start of trading.

A delivery woman from Zomato, an Indian grocery delivery startup, is riding her bike down a street in Kolkata, India on July 13, 2021. (Reuters)

This makes Zomato far bigger than previous business giants. But it will soon be dwarfed if a Paytm share issue is planned. This unicorn pioneered digital wallets and then diversified into several fintech niches. Its market value is estimated at $ 25 billion.

Credit Suisse uses a broader definition of unicorns than most, and estimates that India has 100 unicorns. In 2021 another 16 start-ups became unicorns. Ten new unicorns were created in 2019, 13 in 2020 (despite Covid) and almost three a month in 2021 so far.

The Indians celebrating 30 years of economic reform must applaud this remarkable result. It denotes a new class of companies with little inheritance, connections to the political and social elite, dubious connections to the mafia and corrupt politicians or the dependence on loans from public banks due to phone calls from the Treasury or PMO. These are the children of liberalization, not the rich.

The new stars of liberalization used to be IT companies led by Infosys, Pharma (Sun Pharma), and Auto Accessories (Motherson Sumi). It took these decades of profitability to reach billion dollar valuations. The unicorns did this in a couple of years.

Many older unicorns are household names today, such as Flipkart (now sold to Walmart), Ola Cabs (rideshare), and Byju’s (education). The newcomers in 2021 include Cred (in Fintech), ShareChat (social media, mainly regional languages), Digit (insurance), and Groww (wealth management). GupShup (messaging), Meesho (social commerce), PharmEasy (e-pharmacy), Innovaccer (healthcare), Infra.Market (materials and logistics for real estate), Chargebee (automatic subscription billing and payments), Urban Company (house maintenance and changes), Moglix (industrial tools), MindTickle (software as a service), Firstcry (e-commerce), Zeta (fintech) and BrowserStack (software as a service). They cover a huge spectrum.

Unicorns represent a true revolution in capitalism in which it is not a question of inherited wealth, but of talent and innovative ideas. Billions flow around the world to young people with no business history but promising ideas.

In the past, companies grew gradually. Banks were reluctant to lend to small newcomers. For large, well-connected corporations, it was much easier to get multiple permits and clears while driving than newcomers. Money could only be raised through the stock markets by companies with a proven track record.

That changed with the dizzying rise of newcomers around the world in the dot-com bubble of the late 1990s. Investors have poured billions into new businesses that emerged from the Internet. Dotcom companies’ share prices skyrocketed with the expectation that they could expand tremendously very quickly. So the focus of investors shifted from current profitability to breakneck expansion that resulted in huge losses but opportunities for massive wealth accumulation in the long run.

In 2001 the dot-com bubble burst. Hundreds of companies went bust and many investors were beaten. But the few tech companies that survived – like Google, Facebook, and Amazon – became the largest companies in the world, dwarfing traditional giants like Exxon and General Motors.

This led to a change in the entire capitalist model. Back in the day, those with the most money had the power to build big companies. Now young people with no money but innovative ideas have the most power. The rich line up to entrust their millions to the youth, believing that it is a better use of their inherited millions than trying to start new businesses themselves.

In addition, central banks have flooded the world with unprecedented trillions and driven interest rates to zero or less in some developed countries. In search of better returns, money is flowing to developing countries around the world with higher risks, but also higher returns. And a lot goes into start-ups that could be the Amazons and Googles of the future.

The dotcom experience has shown that the vast majority of innovative start-ups could go bankrupt. So what? Seasoned money managers – mutual funds, venture capitalists, and private equity specialists – manage risk by spreading their bets among dozens or hundreds of newbies. This is how they make money if only one or two newcomers become unicorns.

The economist Paul Krugman once said that productivity is not everything in the long run, but it is almost everything. High productivity requires that money go to the most talented, not those with the richest parents. Traditional capitalism was not very good at channeling money to the most talented. That changes with the advent of the unicorns. It bodes well for the future.


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The views expressed above are the author’s own.


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