Start-Up IPO Blues: Why New-Age Unicorns Often Fail the Litmus Test in D-St Correction

While Indian start-ups often draw a lot of eyeballs when they hit the unicorn status or launch IPOs, the reality doesn’t look fascinating on dalal street. Many new-age companies do not even take five years to surpass the $1 billion valuation, but those ventures have also seen sharp market corrections-post IPO.

For instance, food delivery giant Swiggy which was founded in 2014 took only four years to get the unicorn crown. In November 2024, the company launched its IPO and got listed at Rs 420 a piece on the National Stock Exchange. However, today, its share price has dropped nearly 20% from its IPO price.

Similarly, logistics firm Delhivery which hit the unicorn status in eight years, is trading nearly 50% below its IPO price. The company was listed at Rs 495 per share when the supply chain platform launched its IPO in 2022. Today, its share price stands at Rs 264 on the bourses.

Other companies like Paytm, Nykaa, Ola Electric, First Cry, and Mamaearth-parent Honasa Consumer have enjoyed sky-high valuation in private markets. But their valuations also tumbled after making debut on the stock market.

So, the question here arises: what causes the stark disconnect between private and public market valuations. Analysts weight in on the reasons behind the challenges, red flags, and the road ahead for new-age companies.

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Private vs Public Valuation Gap

Private market valuations of unicorns are usually “inflated” which is driven by investor hype, said Rajnath Yadav, senior analyst at Choice Broking. This reflects the “growth over profitability’ mindset of venture capitalists (VCs) and private equity (PE) firms.

“In private markets, competition among investors and the fear of missing out (FOMO) push valuations beyond realistic fundamentals. However, when these companies go public, their financials face stricter scrutiny, and profitability becomes more critical,” he said while citing some real examples.

Paytm debuted at a valuation of $20 billion, but its stick fell over 70% post-IPO due to massive losses and regulatory issues. Similarly, beauty and personal care platform Nykaa was also valued at $13 billion during its IPO but it saw a steep drop of about 60% due to slowing growth and increased costs.

Echoing similar sentiments, Steptrade Share Service founder Kresha Gupta believes that many new-age unicorns are “loss-making” because their valuations are largely driven by market share and consumer dominance. However, retail investors start evaluating the company on the basis of fundamentals like revenue, profit margins, and debt when they go public.

“These cases highlight a disconnect between investors. While private investors focus on future potential, public markets demand sustainable earnings, exposing vulnerability of inflated valuations,” Yadav added.

They advised VCs to take more balanced approach where companies focus on growing quickly while also keeping an eye on profitability.

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Profitability Takes Back Seat

The main focus remains on rapid expansion, which results in “high cash burn” because these companies rely on deep discounting and customer acquisition. This trend is evident in the quick commerce space, where giants like Swiggy Instamart, Zepto, and Zomato’s Blinkit compete fiercely to deliver every possible product within minutes.

To win customers and build market share, they have relied heavily on discounts, free deliveries, and extensive dark store infrastructure. Reportedly, the Indian quick commerce companies including new entrants are burning cash to nearly Rs 1,300-Rs 1,500 crore on monthly basis. While the numbers reveals how rapidly a company spends its money before generating positive cash flow, it raises question on their long-term sustainability.

However, during market downturns, investors demand profitability and free cash flow, exposing oversized valuation and triggering selloffs, said Mayank Mundhra, FRM-VP Risk & Research Abans Financial Services. And revenue concentration further amplifies this vulnerability as companies usually depend on one or two income sources.

Industries such as quick commerce, fintech, and tech start-ups often see inflated valuations in bull markets, according to Elev8 Venture Partner’s Managing Partner Navin Honagudi.  However, when macroeconomic conditions tighten—such as rising interest rates or reduced liquidity—investors become more cautious. The edtech sector, for example, has seen major valuation resets as growth has slowed post-pandemic, exposing fragile business models.

In contrast, diversified conglomerates with multiple revenue sources navigate corrections more effectively, mitigating financial volatility. All In Capital founder Kushal Bhagia stated that certain sectors like FMCG or consumer brands, and IT services companies can show resilience as their growth rides on India’s rising incomes and the increasing use of AI (artificial intelligence).

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Spot Troubles before IPOs

Apart from profitability, market analysts also suggested investors to focus on various factors like offer for sale from existing investors, dependence on investor money rather than organic cash flow, consistent losses without plan of profitability before investing in new-age companies’ IPOs. Adding to this, Ajit Mishra – SVP, Research, Religare Broking also highlighted the need of focus on companies’ aggressive accounting practices like excessive expense capitalisation and revenue inflation.

“Look for real ‘core’ EBITDA numbers, litigation risks, and high-related party transactions. First level of screening of recent DRHPs suggest that several companies are getting penalised high RPT transactions and high off-balance sheet risks. Investors should keep a track of these ratios to rule out any further worsening,” said Ashwin Mehta, Head of Equity Research at Ambit Capital.

And lastly, investors should also take a look at the audit quality, board and important committees’ constitution. “Very high or very low audit fee, frequent changes in auditor/board members should be considered with a dose of skepticism,” Mehta added.

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Exceptions That Inspire

Amid the flurry of IPOs struggling to perform well on dalal street, a few companies have managed to stand out. Let’s take an example of Zomato. In 2022, the stock price of the food delivery giant declined by 70% due to concerns around the acquisition of Blinkit which was burning cash at that time.

However, Deepinder Goyal-led company was later able to navigate this by focusing on execution, scaling up the quick commerce arm to near break-even EBITDA and building sustained profitability in the food delivery business. For the first time, Zomato reported a net profit of Rs 2 crore in Q1FY24.

Similarly, MakeMyTrip’s stock had also underperformed for several years due to highly competitive market, and Covid-19 pandemic. But later, the travel company expanded TAM through scale up of outbound travel and reducing its marketing spend.

Adding to the list, PB Fintech (Policy Bazaar) also successfully navigated market corrections. While the insurance company operated at losses for years, its business model was designed to drive revenue growth without a proportional rise in costs, gradually reducing cash burn. It turned profitable in Q3 FY24, reporting its first-ever net profit of Rs 37 crore for the period ending December 31, 2023.

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Analysts point to a pattern of overstated valuations when start-ups turn unicorn at breakneck speed like Ola’s AI start-up Krutrim reached $1 billion valuation in a year. The pressure to maintain a balance between growth and financial prudence mounts when they launch IPO which is the primary exit route for VCs and founders. As macro economic conditions tighten, the question arises whether the unicorn dream will remain short-lived for most, or these new-age companies will strongly face market realities.