Caution advised for startups with limited profits contemplating IPO launches.

Launching an initial public offering (IPO) may not be the best move for startups with limited profit pools, according to experts. Public markets are becoming more discerning, with a preference for companies exhibiting at least ₹100 crore in EBITDA or ₹50 crore in PAT, translating to a minimum market cap of around $100 million. Startups boasting only modest profits, particularly those targeting retail investors unfamiliar with the intricacies of volatile markets, could pose significant risks.

The landscape for startups has shifted, with a newfound emphasis on profitability replacing the previous trend of burning through cash. The era of easy money during the pandemic has given way to a focus on sustainable growth and profitability. Some startups, like Meesho and Zepto, have successfully achieved profitability, signaling a shift in the startup narrative.

Market experts point to the changing dynamics post the IPOs of companies like Nykaa, Zomato, PB Fintech, and Paytm, highlighting that merely turning a small profit may no longer suffice for sky-high valuations. Mukul Gulati, President and CIO of Zephyr Management, emphasizes that the Indian IPO market now demands a certain scale, potentially hindering smaller profit-generating startups. While acknowledging exceptions like Amazon, which maintained a small profit pool during an extended investment phase, Gulati warns that perpetual small profit pools could lead to challenges in going public and underwhelming stock performance.

Startups lacking a clear path to profitability might find SME exchanges a viable listing option. Abhimanyu Bisht, General Partner at CapFort Ventures, suggests that the SME Exchange is becoming an attractive choice for startups that have been steadily profitable since their early days. This avenue not only provides an exit for venture capitalists from well-run businesses but also reflects investors' confidence in the company's future.

However, some argue that startups with small profits eyeing public markets should be viewed as long-term plays. Srikanth V J Tanikella, Managing Partner at Pavestone Capital, notes that while traditional metrics prioritize profitability, certain firms prioritize scale, innovation, and market disruption, often garnering support from venture capitalists. Nevertheless, a clear roadmap to profitability, scalable operations, and market resilience are essential for sustained success.

Despite the trend of startups with modest profits tapping into primary markets to raise capital, caution is advised. Sunil Shekhawat, CEO of Sanchiconnect, expresses concern that this trend may be a means for initial backers to exit, transferring investment risk to less-informed retail investors. If startups lack a solid strategy for profitability and sustained growth post-IPO, the consequences could be severe for both individual investors and the broader startup ecosystem. Prudent planning, adherence to an economical operational model, and a transparent path to profitability are recommended before pursuing public offerings to protect investor interests and uphold the startup ecosystem's integrity.