The Startup IPO Trap: How Listings Create Early Winners and Late Losers

India’s stock market regulator, SEBI, allows loss-making or just-turned-profitable startups to go public. The intent was progressive — to modernise capital markets, attract global money, and give India’s startup ecosystem access to public capital. But nearly four years after the big Startup IPO wave began, the results tell a more sobering story. 

According to a study by Client Associates, only about 36% of IPOs in India have generated long-term alpha — meaning they actually outperformed the broader market over time.

“The headline numbers dazzled. The long-term outcomes often did not.”

This gap between first-day celebration and long-term reality now defines India’s startup IPO experience.

Why SEBI Changed the Rules

For decades, India followed a conservative listing framework. Companies were required to show operating profits for three consecutive years before accessing public markets. The rule existed to protect small investors from speculative businesses.

Then came the startup era.

Modern tech startups do not optimise for early profitability. They optimise for speed, scale, and customer acquisition, burning capital today to dominate tomorrow. Under legacy rules, many of India’s most visible startups would have remained private indefinitely.

To bridge this gap, SEBI introduced Regulation 6(2). It allows loss-making or newly profitable companies to list, but under strict conditions — most notably, 75% of the IPO must be allocated to Qualified Institutional Buyers, while retail investors get just 10%.

“The reform wasn’t reckless. It was calibrated.”

The logic is sound. Institutions are assumed to have the expertise to value complex, cash-burning businesses. If they commit large sums, pricing gains credibility. The structure also attracts global sovereign funds and gives venture capital investors a clear exit — recycling capital back into India’s startup ecosystem.

On paper, the framework looks balanced.

In practice, it creates a distortion few retail investors fully understand.

The Low-Float Illusion

When these startups list, most of their equity is still held by founders and early investors. SEBI mandates a lock-in period — usually six months to a year — during which these shareholders cannot sell. Even institutions face selling restrictions.

The result is predictable. At listing, very few shares are actually available for trading. Demand is high. Supply is artificially restricted. Prices rise sharply.

“What looks like market validation is often just engineered scarcity.”

The stock surges, headlines celebrate a “successful IPO,” and social media lights up. Retail investors see green charts and assume fundamentals have been endorsed.

In reality, genuine price discovery has merely been postponed — until the lock-in expires. Companies like Mobikwik and Honasa Consumer saw euphoric listing gains evaporate once supply normalised.

“Smart money enters early and exits on time. Retail money often arrives during peak optimism.”

When Supply Returns, Prices Relearn Gravity

Once the lock-in period ends, the market structure flips almost overnight. Founders and early venture investors, who entered at negligible costs, finally get liquidity. Large volumes of shares hit the market. Supply overwhelms demand.

Prices adjust — often violently.

By December 2025, the pattern is no longer anecdotal. It is structural.

Take Paytm. Listed in November 2021 at ₹2,150 per share, it symbolised India’s fintech ambition. Four years later, despite a rebound phase, the stock still trades around ₹1,000–1,050 — roughly 50% below its IPO price.

“Early investors exited near the peak. Public shareholders absorbed the drawdown.”

Then there is Nykaa. Listed at ₹1,125 in 2021, it now trades near ₹250. Even after a strong 2025 rally, the stock remains nearly 80% below its issue price.

“A great brand does not always make a great IPO.”

The pattern repeats across the startup universe. PB Fintech trades below its IPO price despite operational progress. Delhivery continues to struggle with margins and rerating expectations. CarTrade remains a stark reminder of peak-cycle pricing excess.

There are exceptions. Zomato has delivered nearly four times its IPO price after a dramatic turnaround.

“Zomato proves success is possible — but also how rare it really is.”

A Reform That Works — With a Cost

SEBI’s approach is not a regulatory failure. It deepened India’s capital markets, attracted foreign capital, and gave startups access to scale funding. Regulation 6(2) worked exactly as designed.

But it also shifted risk.

Institutional investors entered early, sized their exposure, and exited strategically. Retail investors often entered later — during hype, low float, and incomplete price discovery.

“Listing-day gains are not validation. They are often just timing.”

The real verdict on any startup IPO arrives after the lock-in ends, not on debut day.

India’s startup IPO wave was a necessary reform for a growing economy.
For many retail investors, it has also been an expensive education in market structure.

“In public markets, smart money plans the exit early. The public often learns the ending later.”

Attribution: This article is inspired by and based on a financial analysis shared by Jayant Mundhra in a LinkedIn post, combined with publicly available disclosures and independent editorial interpretation by TICE News.