The Great Unraveling, How a Funding Winter is Forcing Indian Startups into a Premature IPO Era
From Unicorns to Underperformers: The Perilous Journey from Private Hype to Public Scrutiny
Introduction: The Reluctant Debutante
In the grand ballroom of global capitalism, an Initial Public Offering (IPO) is traditionally seen as a coronation—a moment of arrival where a successful, mature company steps onto the public stage to be celebrated and capitalized for its next phase of explosive growth. For decades, the blueprint from Silicon Valley was clear: stay private for as long as possible, grow at all costs, and only go public when you are robust, profitable, and ready to command a premium from a vast pool of public market investors.
In India, however, a starkly different narrative is unfolding. As journalist Samidha Sharma reveals, the IPO is increasingly becoming an act of desperation, not a crowning achievement. A founder’s candid admission—”No one was ready to finance my next phase of growth and write a $100 million cheque… so I decided to go public”—encapsulates this new, unsettling reality. India’s startup ecosystem, once buoyed by a seemingly endless flow of late-stage private capital, is now facing a harsh winter. The result is a rush of young, often unprofitable companies tapping public markets not by design, but by default, fundamentally altering the risk profile for millions of retail investors and threatening the long-term credibility of India’s tech story.
The Vanishing Act: Where Did the Big Cheques Go?
The core of the crisis lies in a dramatic pullback from the very investors who built India’s startup landscape. For over 15 years, crossover funds (which invest in both public and private markets), hedge funds, sovereign wealth firms, and marquee names like Tiger Global, SoftBank, and Prosus poured billions into Indian tech, chasing the dream of finding the next Flipkart or Paytm. They fueled a “growth at all costs” model, prioritizing user acquisition and market share over profitability, and creating a generation of unicorns with sky-high valuations.
This era is over. A confluence of factors has led to their retreat:
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Global Macroeconomic Shift: Rising interest rates globally have made risky, long-duration assets like tech startups less attractive compared to safer bonds. Investors are now demanding profitability and positive cash flow, not just top-line growth.
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Poor Returns from Indian Bets: Many of these large late-stage investments have failed to deliver the promised exponential returns. High-profile stumbles and valuation markdowns have forced these funds to re-evaluate their India strategy and become more conservative.
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The AI Frenzy: Globally, vast pools of capital are now singularly focused on Artificial Intelligence. Samidha Sharma points out that non-AI startups, which constitute the vast majority of the Indian ecosystem, are simply not aligned with this new investment “thesis.” While OpenAI achieves an $800 billion valuation in secondary sales and Stripe stays private at $91 billion, Indian fintech and consumer internet companies are struggling to find believers.
This has created a massive funding vacuum at the Series C stage and beyond, leaving mature startups that need large capital infusions to scale, acquire, or simply survive, utterly stranded.
The Public Market Lifeline: A Bitter Pill to Swallow
With the private funding tap turned off, the IPO has become the only remaining lifeline. However, this path is fraught with peril:
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Sobering Valuations: Startups are being forced to accept a harsh new reality. The days of raising each round at a 2x or 3x valuation bump are gone. As the article notes, flat or lower valuations compared to their last private round have become the norm for listings like Swiggy, FirstCry, and Go Digit. This “down round” in the public market is a brutal blow to founder and employee morale and a clear signal that public market investors are far more skeptical than their private counterparts.
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Trimming of Ambition: Many companies are not only accepting lower valuations but also reducing the size of their IPO, raising less money than initially planned. This forces them to scale back growth plans and focus on an immediate path to profitability, a difficult pivot after years of being told to burn cash to win markets.
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The “Small-Cap” Fate: This trend threatens to turn promising tech startups into just another small or mid-cap stock story. Instead of delivering the 100x returns that venture capital dreams of, they may only offer the 2x-3x returns typical of private equity—a fundamentally different and less exciting outcome for the ecosystem’s early risk-takers.
The AI Divide: India’s Missing Narrative
A critical element exacerbating this crisis is India’s conspicuous absence from the global AI bonanza. While the world throws billions at foundational models, generative AI, and AI infrastructure, India’s startup funding at the early stage is still heavily concentrated in “not-so-crazy sectors” like quick commerce, fashion, and direct-to-consumer (D2C) brands.
These are viable businesses, but they lack the world-changing, high-margin, platform-level potential that gets global investors excited today. The article highlights a “big chasm” between the US and Indian tech scenes, the largest in over a decade. Until homegrown, world-class AI startups emerge, it will be “hard for billion-dollar cheques to be written for anything” in India.
Case Studies in Struggle: The Public Market Reckoning
The post-listing performance of many of these companies validates the concerns about a premature rush to IPO.
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Swiggy: The 11-year-old food delivery giant went public amidst much fanfare in late 2023. However, with its quarterly losses ballooning to nearly double year-on-year (over ₹1,197 crore), its journey to profitability is now the only story that matters. The stock’s performance is inextricably linked to its ability to stem these losses, a daunting task in a fiercely competitive market.
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One97 Communications (Paytm): Listed in 2021 in one of India’s most anticipated IPOs, the company’s stock still trades 40% below its IPO price of ₹1,950. It serves as a cautionary tale of how regulatory hurdles, complex business models, and the intense scrutiny of public markets can dismantle private market hype.
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Beyond the Stars: While exceptions like Zomato, Policybazaar, and BlackBuck have performed well, they are the minority. Most startups from the IPO wave of the last few years are languishing below their listing price, indicating that the market was overly optimistic in its initial pricing and is now undergoing a painful correction.
A Silver Lining? The Discipline of Public Scrutiny
Despite the grim outlook, this forced transition to the public markets may have a long-term beneficial effect. The past 15 years of easy money fostered a culture of indiscipline, where growth was pursued with little regard for unit economics or a path to sustainability.
Public market scrutiny, with its quarterly earnings reports and relentless analyst questions, imposes a much-needed discipline. It forces founders to focus on profitability, efficient operations, and transparent governance. This painful but necessary maturation process could ultimately lead to the creation of stronger, more resilient, and genuinely valuable companies—the kind that form the bedrock of a developed economy.
Conclusion: Navigating the New Board Game
The Indian startup ecosystem is at an inflection point. The easy money is gone, and the era of growth-funded vanity metrics is over. The path forward is narrower, steeper, and requires a different playbook.
Founders must now build with capital efficiency from day one, prioritizing sustainable business models over vanity valuations. Investors need to adjust their expectations and support companies through this transition to profitability. Most importantly, the ecosystem must urgently foster innovation in deep-tech and AI to create the kind of compelling narratives that can attract the next wave of global capital.
The IPO should not be a default option for the capital-starved; it should be a strategic choice for the truly ready. The current wave of listings by default is a symptom of a system in transition. The hope is that this period of austerity and scrutiny will weed out the weak and forge the strong, ultimately building a more mature and credible Indian tech economy that plays a very different—and ultimately more successful—board game.
5 Q&A
Q1: What is the primary reason so many Indian startups are opting for IPOs now?
A1: The primary reason is not growth ambition but necessity. There has been a severe pullback in late-stage private funding, particularly large rounds ($100M+) from crossover funds and hedge funds like Tiger Global and SoftBank. With their traditional funding source dried up, IPOs have become the only viable option for these startups to raise significant capital and continue operations.
Q2: How are the valuations of these IPOs different from the startups’ last private funding rounds?
A2: In a stark reversal of past trends, many startups are going public at flat or even lower valuations than their last private round. This “down round” phenomenon reflects the much greater skepticism and demand for realistic pricing from public market investors compared to the often-irrational exuberance of private markets.
Q3: Why is the global AI boom a problem for Indian startups seeking funding?
A3: Global capital is currently hyper-focused on investing in AI and AI-related companies. Since the vast majority of large, mature Indian startups are in sectors like fintech, e-commerce, and quick commerce (non-AI), they are not aligned with this new investment thesis. This makes it extremely difficult for them to attract the attention and cheques of large international investors, widening the funding gap.
Q4: What is the potential long-term benefit of this wave of IPOs, despite the current struggles?
A4: The long-term benefit is the imposition of financial discipline. Public markets demand transparency, profitability, and sustainable growth. This forces founders to abandon the “growth at all costs” model and focus on building fundamentally sound businesses with strong unit economics, which should lead to more resilient and valuable companies in the long run.
Q5: What does the article mean by suggesting these IPOs could lead to a “private equity-type outcome”?
A5: Venture Capital (VC) seeks outlier, “moonshot” investments that can return 100x or 1000x the capital. Private Equity (PE), often investing in more mature companies, typically targets more modest returns of 2x-3x. If tech IPOs only deliver steady, modest growth, they will provide PE-like returns. This would be a disappointing outcome for the high-risk VCs who funded these companies early on and could make them hesitant to invest in similar ventures in the future.
