The Indian stock markets are bracing for another wave of what the fashionable set calls ‘digital IPOs’. The definition keeps evolving with each new buzzword— platform, AI, technology-enabled, and so on. My definition is simpler and more accurate: companies that have never made a profit and probably never will.
The real damage from these unprofitable digital companies goes far beyond individual investors losing money in overpriced IPOs. It strikes at the heart of how market economies are supposed to function.
Why does a market economy generate more wealth and growth than a controlled one? The reason is failure. The greatest advantage of a market economy is not just that good businesses succeed, but that the bad ones fail. Businesses that cannot make money are forced to shut down quickly, freeing up resources of all kinds that flow into good businesses.
The entire ecosystem of the so-called tech sector now works in the opposite way. Capital keeps flowing into businesses that are unsustainable, not just for months and years, but for decades. This creates enormous distortions for employees, competitors and customers alike.
Traditional taxi services around the world, including in India, were disrupted by companies that still do not make money. These companies have raised prices, damaged traditional taxi services, and left both drivers and customers worse off. More recently, quick grocery delivery services have begun disrupting traditional grocery shops. We can already forecast where this will lead.
In fact, this new tech sector most closely resembles India’s old public sector. Money keeps coming in without any need for profits or efficiency, and eventually it becomes an economic disaster. There was perhaps some excuse for it when the money came from foreign venture capital and other investors who understood the risks.
However, now that the game has shifted to Indian equity markets, another class of potential victims has been added to the growing list—the Indian retail investor. In fact, an analysis of nine high-profile ‘digital’ IPOs over the last three years shows that six are still below the issue price, and most are deeply unprofitable.
The machinery being deployed to attract these retail investors is particularly sophisticated. Consider a recent example: a well-known retailer preparing for an IPO at an enormous valuation that’s hard to justify. A respected investor recently bought some shares at the upper end of the expected IPO price band. This relatively small investment—a minuscule fraction of the total valuation—will likely attract thousands of crores from retail investors who see the big name and assume it is safe. This is an illusion. The great irony is that in the technology world, there are only a handful of Google– or Amazon-type businesses that achieve genuine success and profitability. The far larger number comprises companies that have never made money, and probably never will. Many of them are in India, too.
The solution for retail investors is straightforward: stay away. These IPOs are designed to transfer wealth from your pocket to promoters and early investors. The information advantage lies entirely with the sellers, who choose when to come public and at what price.
Think about it: the promoters and existing investors know everything about the business–every strength, every weakness, every risk. They choose to sell to you at exactly the moment when it suits them best, which usually means when valuations are high and market sentiment is euphoric. As Warren Buffett once observed, an IPO is a negotiated transaction, and it is unlikely to be at a time that is favourable to you. You, meanwhile, have only the carefully curated prospectus to rely on.
There are always better alternatives in the secondary markets. Companies with proven business models, actual profits, and reasonable valuations. Let the institutional investors and venture capitalists gamble on unprofitable businesses if they wish. The rest of us should stick to investing in companies that actually make money.
Bad businesses must fail, and fail fast. The modern financial sector is focused on sabotaging this.
Dhirendra Kumar is founder and chief executive officer of Value Research, an independent investment advisory firm