Indian Tech IPOs: Evaluating Overvalued Startup Investments

As the digital economy matures, the stock market has become flooded with Initial Public Offerings (IPOs) from some of the nation’s most prominent startups. At Sprite Genix, we continuously monitor market dynamics to help businesses and entrepreneurs navigate complex financial landscapes. Recently, the massive buzz surrounding Indian tech IPOs has raised a critical question for both institutional and retail investors: Are these companies fundamentally strong, or are they vastly overvalued?

In this comprehensive analysis, we will dive into the data behind recent Indian tech IPOs, examining the mechanisms that drive their valuations and what it means for the future of startup investments.

In recent weeks, there has been immense hype surrounding the IPOs of prominent consumer brands like Boat and Lenskart. However, alongside the excitement, significant skepticism has emerged. Many industry experts argue that these Indian tech IPOs are heavily overvalued, warning that there are better ways to invest than pouring money into hyped tech companies.

A recurring theme among these IPOs is the presence of famous founders who sometimes step down from executive roles right before going public—a move widely considered a red flag for potential investors. Furthermore, companies like Physics Wallah face what analysts call "Key Man Risk". While the company shows steady growth, its entire brand heavily relies on its founder, Alakh Pandey, making its long-term stability highly dependent on a single individual.

To truly understand the landscape of Indian tech IPOs, we must look at the data. Lenskart presents a fascinating, yet controversial, case study.

When Lenskart pitched itself to investors, it claimed a staggering valuation of Rs 70,000 crores. What shocked market analysts was that just a few months prior, the company's valuation sat at Rs 8,700 crores. This represents an astronomical 700% increase in mere months, despite no significant changes in its profits, revenue, or underlying business fundamentals during that short window.

One of the most vital metrics for evaluating Indian tech IPOs is the Price-to-Earnings (PE) ratio. For most established, stable companies in India, the PE ratio hovers between 25 and 40. Lenskart, however, entered the market with an astronomical PE ratio of 235. Defenders of the company argue that this valuation does not reflect present earnings but rather the massive future potential of the organized eyewear market.

How does a company convince the public to buy in at such high valuations? The answer lies in anchor investors. Before an IPO opens to retail investors, Indian regulations allow companies to sell up to 30% of their shares to large institutional buyers. In Lenskart's case, global giants like Goldman Sachs, JP Morgan, and the Singaporean government stepped in.

Out of the Rs 7,200 crores worth of shares sold in the IPO, anchor investors purchased 45% (Rs 3,200 crores) within a price band of Rs 380 to Rs 400. This strategy is designed to lend immediate credibility to the company, creating a massive buzz. Consequently, Lenskart's IPO was oversubscribed by 28 times, with the public buying up the available 18 crore shares in just 5 hours.

A critical element that retail investors often overlook in Indian tech IPOs is the allocation of funds. When Lenskart raised Rs 7,000 crores, only Rs 2,000 crores were allocated for actual business operations and growth. The remaining Rs 5,000 crores served as an exit payday for founders and early investors.

This is not an isolated incident. In 2021, Paytm launched a historic Rs 18,300 crore IPO. Out of that massive sum, Rs 10,000 crores went directly to early backers like Alibaba and Softbank. Additionally, just weeks before Lenskart's IPO, founder Piyush Bansal purchased shares at a heavily discounted rate of Rs 52, netting him approximately Rs 820 crores when the IPO launched at Rs 400.

While the SEBI chairman has clarified that such early exits and founder profits are legally permissible—acknowledging the heavy risks early investors take—it often leaves retail investors buying into a company that has already experienced its most explosive growth phase.

When powerful anchor investors enter at high prices, expectations skyrocket. Unfortunately, once the initial hype fades and regular trading begins, retail investors frequently find themselves holding the bag.

Consider the trajectory of several major Indian tech IPOs:

• Paytm: Despite immense fanfare, the stock crashed by 30% shortly after its debut, leaving immediate buyers at a steep loss.

• Nykaa: Launched at Rs 1,000 per share, it initially doubled in value. However, as profit margins shrank and market competition intensified, the stock plummeted.

• Zomato: Opening with a 25% immediate profit margin, Zomato later struggled as cash reserves fell. It only recovered and surpassed its IPO valuation after achieving profitability through its quick-commerce arm, Blinkit.

Conversely, companies with strong, immediate financial fundamentals perform exceptionally well. Groww (Billion Brains Garage Ventures) launched its IPO backed by Rs 4,000 crores in revenue and Rs 1,800 crores in clear profit. Because investors were buying into a profitable reality rather than just a future dream, the stock surged 30% on its very first day.

At Sprite Genix, we advise entrepreneurs and investors to look past the marketing. Here are three crucial strategies for evaluating Indian tech IPOs:

1. Assess Your Investment Horizon: If you are investing in highly valued tech startups, you must be prepared to hold your assets for up to 10 years.

2. Understand Valuation Mechanics: Buying at a peak valuation means you are betting entirely on future performance. If a company lacks a clear path to profitability, wait for the hype to settle.

3. Ignore the Hype: Oversubscription and the presence of anchor investors do not guarantee success. Just because an IPO is popular does not mean the underlying business is profitable.

1. What are anchor investors in Indian tech IPOs?

Anchor investors are large financial institutions (like mutual funds or global banks) that purchase up to 30% of a company's shares before the IPO to build market credibility.

Lenskart launched with a Price-to-Earnings (PE) ratio of 235—drastically higher than the standard 25-40—while its valuation jumped from Rs 8,700 crores to Rs 70,000 crores in just months.

No. SEBI clearly states that it is legally permissible for founders and early investors to use IPOs as an exit strategy to reap rewards for their initial risks.

Yes. Companies with strong existing profits, such as Groww, or those that successfully pivot to profitable models, like Zomato with Blinkit, have yielded strong returns.

It varies, but often a minority. For example, out of Lenskart's Rs 7,000 crore IPO, only Rs 2,000 crores were used for operations, with the rest going to early investors.

Understanding market trends and data-driven valuations is key to scaling any modern business. At Sprite Genix, we specialize in transforming industry insights into actionable, high-growth digital strategies for our clients. Whether you need cutting-edge SEO, robust content marketing, or advanced web development, our expert team is here to elevate your brand. Contact Sprite Genix today to future-proof your business and dominate your digital landscape!