Decoding the KPI conundrum of new-age companies hitting the public market

Tech start-ups do not reveal important numbers to back their narratives of consumer flywheels and unrelenting growth

Loss-making new-age companies are going to the stock markets demanding stratospheric valuations — Paytm and Policybazaar were priced at more than 50 times FY21 revenue, Zomato at 20 times FY21 revenue, Nykaa sought a multiple of 23 times — but they have done little to explain their reasons for doing so.

This trend may be about to change as markets regulator, the Securities and Exchange Board of India (Sebi), announced a raft of proposals last week seeking to mandate disclosures of audited Key Performance Indicators (KPIs), details of pre-Initial Public Offering (IPO) deals with private investors and justification of IPO pricing, among other things.

“Sebi’s efforts are important to ensure that the public market investor is not presented with a black box at the IPO. Although it is said that valuations are generally high in the private market where start-ups raise money from VCs (venture capitalists), we do get detailed valuation reports made that show the math in a sense,” said Siddarth Pai, managing partner at VC firm 3One4 Capital.

On one hand, these tech companies have repeatedly said not to judge their companies by the same yardsticks of balance sheet fundamentals. On the other hand, they have also not shared important facts and figures to back their narratives of consumer flywheels and unrelenting growth.

For instance, Paytm did not shed much light on its loan disbursals in its draft red herring prospectus (DRHP) — and started revealing more about its credit statistics only after a battered listing. Online hotel aggregator Oyo, which is present in more than 35 countries and considers certain European and Southeast Asian markets as key drivers of growth, does not say how well those geographies are doing individually in its IPO prospectus.

“Some of the technology companies that went public jacked up their valuations two or three times in a funding round just before the IPO. On a closer look, you will find their existing investors participated in those rounds to lend credibility to the valuation uptick,” said Anurag Singh, a US-based fund manager whose critiques of technology IPOs have gone viral on Twitter over the past few months.

“I think Sebi’s proposals on disclosing details of private market rounds will go a long way in curbing such practices,” he added. 

Does this mean that key metrics that technology start-ups lay out in their pitch decks for private market investors will now be available for the retail investors?

Experts say it won’t still be easy to get numbers such as customer acquisition cost (CAC), daily and monthly active users, average session duration or net promoter scores from technology start-ups going public.

“It will be difficult to define KPIs as they might differ even within the tech sector. For example, CAC is an important metric for consumer tech and SaaS companies, but it does not make sense for a lot of B2B companies,” said Pai.

Another reason is that VC and private equity (PE) firms tend to include the nature and frequency of such disclosures in their shareholder and share-purchase agreements, which do not apply to public shareholders.

“Also, these demands for periodic disclosures of KPIs are typically made when a VC firm makes a large investment in a start-up. For example, when Sequoia takes a 20 per cent stake in a funding round, it might ask for such numbers. But an investor in the private market who makes an investment for a two per cent or five per cent stake won’t be able to ask for it,” said Sachin Dixit, an internet equity research analyst at brokerage firm JM Financial.

He also says that some of his peers in the analyst fraternity are yet to figure out how to interpret even the metrics that are available. 

“In the December quarter, Nykaa did not see a huge growth in new unique visitors to the platform. While some may see it in a negative light, the reason for that is that it was focusing on more transactions per user as it was the festive season. So, bottom-of-the-funnel marketing was given more importance to double down on sales rather than top-of-the-funnel,” the analyst explained.

According to him, disclosures of KPIs will only improve going forward as analysts learn to ask better questions of the new-age companies. “Over the past few months, we have been giving feedback to them and they have been responsive,” he says.

The Sebi proposals are about pre-IPO disclosures but they do not yet mandate anything on KPI disclosures after the listing. This might be something that the market regulator would need to consider in the future, according to experts.

“There is an obligation to reveal all those things to your investors on a quarterly basis. It is fair if they say that metrics like P/E are a bit outdated for tech businesses and they should be valued on user growth and their branding. But then you have to give granular data about your user base comparable to the audited financial statements,” said Zerodha founder and CEO Nithin Kamath.

For instance, food delivery company Zomato does not share the number of orders it delivered in a quarter with its investors. 

This number is important because it helps decipher the average order value — which is typically a key performance indicator (KPI) in the e-commerce business, and more so for a food delivery company. Experts pointed out that the average order value is factored in to calculate profitability and valuation of the company.

Zomato’s listed global peers — Doordash in the US and Deliveroo in the UK, both of which debuted in the public markets amid the pandemic — reveal this metric on a quarterly basis. 

But Singh pointed out that, “For this to happen, the regulator would need to come out with a clear format of what should be shared. This will not only be difficult to do because different sectors have different KPIs, but also because it will put traditional companies in a tough spot. Iron, steel, cement companies ke promoters bhi phas jaenge, (promoters of iron, steel and cement companies will also get caught in this requirement).”

“We also have to understand that over-regulation is never good. If that happens, new-age companies might say they don’t want to list in the country at all,” he added.

New age, new metrics

• Sebi says metrics, such as P/E multiples, earnings per share, and return ratios cannot be applied to new-age companies
• Regulator believes the disclosures made under the ‘Basis of Issue Price’ section in an offer document need to be “supplemented with non-traditional parameters” 
• The regulator has said key performance indicators should be defined clearly and not be misleading
• Further, KPIs would be required to be certified by a statutory auditor
• Wherever possible, KPIs will be compared with those or listed peers both domestically and abroad.