Loss-Making Startups Prioritize Growth Funding in IPOs Over Shareholder Exits

Young, loss-making startups preparing for initial public offerings (IPOs) are increasingly keeping the fresh issue component large to fund their growth plans as investors grow wary of large shareholder exits from companies that still require capital to scale and turn profitable, according to experts.

Quick commerce platform Zepto’s proposed Rs 8,010-crore fresh issue is the latest example of this. It follows similar moves by Ola Electric and PhysicsWallah, whose offer for sale (OFS) portions were about 10-11% of their IPOs.

In the case of Curefoods, which filed for a Rs 800-crore fresh issue, the value of its OFS will depend on the final pricing. The company, however, has put its IPO plans on hold amid market choppiness.

These companies have listed, filed or tested IPO plans within five to seven years of founding.

This is different from the 2021-22 startup listing cycle, when the market was still opening up to new-age companies and was more accepting of large secondary share sales.

An ET analysis of more than 40 venture-backed and new-age firms shows that seven of the 10 new-age IPOs in 2021-22 had an OFS component of more than 50%. The median OFS share in that cohort was about 80%.

While Zomato and Delhivery were fresh issue-heavy, Paytm, Policybazaar, CarTrade, Nykaa, RateGain, MapmyIndia, Nazara and Tracxn had larger secondary components. But as a group, the OFS chunk in the first cycle of IPOs was much larger than in the loss-making companies in the newer cohort.

This change reflects two shifts. First, early investors in younger firms are not necessarily at the end of their fund cycles and may prefer to hold for a post-listing upside. Second, a fresh issue-heavy IPO generally indicates to public investors that the proceeds are going towards growth, scale and profitability, rather than mainly towards exits.

“Investors are not saying loss-making companies cannot list,” said an investment banker who has worked on new-age IPOs. “But if a company still needs capital to build scale and improve profitability, a large OFS sends the wrong signal. A fresh issue heavy listing is easier to justify because the money is going into growth and balance-sheet strength.”

This is where the market has moved since 2021. At the time, investors were willing to underwrite large addressable markets, category leadership and future operating leverage. Since then, post-listing volatility, valuation corrections, and concerns around cash burn have made them more careful about how IPO proceeds are used.

For Zepto, the need is quick commerce expansion, where companies are spending on dark stores, supply chain, delivery infrastructure, technology and customer acquisition.

Ola Electric needed capital for manufacturing, research and distribution.

PhysicsWallah has been expanding offline and its hybrid learning centres, while Curefoods’ proposed issue was aimed at funding food brands and cloud-kitchen operations.

“Today’s startups are reaching meaningful scale, stronger governance standards and greater business predictability much earlier than their predecessors,” said Aakash Agrawal, associate director at Anand Rathi Investment Banking. “As a result, the public markets are becoming a natural source of growth capital rather than merely an exit avenue.”

The broader IPO pack shows that large OFS components have not entirely disappeared. Groww, Lenskart and Urban Company had larger secondary components, but they were scaled, older and profitable by the time they listed, reducing the need for substantial fresh capital and making investor liquidity easier to defend.

Swiggy’s OFS was shaped significantly by Prosus’ sell-down; Meesho, while loss-making, kept its listing fresh issue heavy and showed improvement in operating metrics.

Oyo, despite being older, has proposed a nil-OFS issue, underlining that capital needs and market signalling now matter as much as age.

The emerging rule is that a large OFS is harder to justify when the company is young, loss-making and still asking public investors to fund growth. For such startups, the market is increasingly expecting IPO proceeds to go into the business. For profitable and scaled companies, investor liquidity can still be part of the offer.