First, Understand the Business Model
Before you even look at the numbers, you need to understand what the company actually does. Most of these new-age companies are 'asset-light', meaning they don't own large factories or physical infrastructure. Instead, they use technology to disrupt existing
industries. Try to classify the business into a common startup model. Is it a marketplace that connects buyers and sellers (like an e-commerce platform), a direct-to-consumer (D2C) brand that sells its own products online, or a Software-as-a-Service (SaaS) company that sells subscriptions to its software? A clear and sustainable business model is the foundation of any good investment. Ask yourself: who are its customers, how does it make money on each transaction, and what prevents a competitor from doing the exact same thing tomorrow?
The Paradox of Profitless Growth
It seems counterintuitive: why would a company that is losing crores of rupees ask for thousands of crores from the public? The answer lies in their strategy: prioritise growth over profitability. These startups are in a race to capture as much market share as possible. They spend heavily on three main areas: marketing and discounts to acquire new customers, technology to build a better product, and high salaries to attract top talent. The core belief is that once they become the dominant player in their market, they can reduce these expenses and turn profitable. Investors are therefore not buying into current profits, but into the potential for future profits. When analysing, look for a clear path to profitability. Are their 'unit economics' healthy? This means, are they on track to eventually make more money from a customer over their lifetime (Lifetime Value or LTV) than it cost to acquire them (Customer Acquisition Cost or CAC)?
Decoding Sky-High Valuations
Traditional valuation metrics like the Price-to-Earnings (P/E) ratio are often irrelevant for loss-making startups. Instead, investment bankers and institutional investors use a different toolkit. They might use a Discounted Cash Flow (DCF) model, which projects the company's future cash flows and then discounts them back to the present day. Another common method is Comparable Company Analysis, where they look at the valuation of similar listed companies in India or even globally. They don't just look at profits; they analyse metrics like revenue growth rate, Gross Merchandise Value (GMV) for e-commerce, or Annual Recurring Revenue (ARR) for SaaS businesses. Essentially, the valuation is a story about the company's future potential, its addressable market size, and the strength of its management team.
What to Check in the IPO Document
The most important document for any IPO investor is the Draft Red Herring Prospectus (DRHP). It contains crucial details that can help you make an informed decision. One of the first things to check is the 'Use of Proceeds' section. Is the company raising money primarily for business expansion (a 'fresh issue') or are existing investors selling their shares (an 'Offer For Sale' or OFS)? For a young, loss-making company, a large fresh issue is generally a positive sign, as it indicates the capital is being used for growth. A large OFS might suggest that early investors are cashing out. Also, study the 'Risk Factors' section carefully and assess the quality and experience of the promoters and key management personnel. Consistent revenue growth over the last three years, even with losses, is another key indicator to look for in the financial statements.
