New Age Terms of New Age Startups!
Updated: Jul 19, 2021
New age Start-up IPO terms, one must know!
As the new age of startups have mushroomed and many reaching the unicorn phase, it makes sense to know them a little bit closer to understand how the investment bankers would value such types of companies. The new era of consumer-focused technology driven startups going public has begun and there is a line of startups coming up with their IPOs
While Indian IPO investors have tasted Zomato, public issues of Mobikwik, Paytm, Nykaa, Policy bazaar, Ixigo, Delhivery, Flipkart etc. are said to be in the pipeline. When you read offer documents of IPOs, you will come across terms such as GMV, AOV, cash burn, MAU, DAU, CAC, churn etc. As many of these new IPO bound firms are yet to make profit, focus is on the operational metrics. It becomes important to understand the business model, prospects and multibillion dollar valuations.
GMV
GMV is the total transaction volume of merchandise transacted through the marketplace in a specific period
GMV can include taxes, fees, and services, and gross of all discount. Often the most recent month or the recent quarter’s GMV is annualized.
In case of Paytm, FY21 GMV is ₹4 lakh cr. GMV is a useful measure of the size of the marketplace. For instance, during Covid ravaged festival season of Oct Nov 2020, Flipkart and Amazon led the $8.3bn festive GMV pie, indicating their massive size. Actual revenues are only a portion of GMVs.
For instance, Mobikwik's FY21 GMV was about ₹15,000cr but revenue from operations is ₹290cr Revenue consists of the various fees charged by such a company. In case of Paytm, the revenue from operations is around ₹ 2,800 cr, less than 1 % of reported GMV.
GMV is also referred to Gross Transaction Value, or GTV. The ticket size in a business matter. Tech driven startups work on volumes. Each time someone places an order, the company gets a certain sum. So, if the company can do an order by spending ₹200 and make ₹210 via fees, then it has positive unit economics
AOV
To understand positive unit economics, look at a metric called Average Order Value (AOV) which is calculated by dividing GMV by the number of orders during a given period
The higher the AOV, the better the chance of breaking even and clearer is the path to profitability, provided the take rate is not reduced. Take rate is the percentage fee charged by a marketplace on a transaction
Cash Burn
Loss making companies fail when they run out of cash and don’t have enough time left to raise funds. Cash burn is computed by subtracting cash balance at the beginning of the year from cash balance at the end of the year.
Startups are known to burn high cash amounts by chasing growth. When Google was burning cash in 1999-2001, money was going into building HighTech Internet products. Ditto for Facebook and Amazon in respective periods.
However, many Indian startups burn cash to sustain businesses. And, now they are getting listed. Hence, investors must be able to identify whether the fundraise is aimed to just meet expenses.
Once a company with high cash burn is listed, it would have to raise money by diluting equity or get merged/acquired by a bigger business. This can impact public shareholders. When they are unlisted, firms can tap venture capital funds etc. to get cash and consequently get valued higher in each funding round to get more cash.
But this is the reason founders of some hypergrowth firms end up with small equity ownership. But when they are listed, long periods of cash burn can push the company towards insolvency
Churn Rate
Businesses are successful when they do repeat business. The churn rate is the percentage of existing customers who stop doing business with an organisation over a specific time.
Successful software companies report annual churn rates less than 57 % High churn rates are not good, neither are higher CAC (Customer/ Consumer Acquisition Cost). CAC is the cost of winning a customer to purchase a product/ service and is expressed in per user terms.
For instance, Mobikwik’s new registered user CAC was just ₹11.51 in FY21. So many firms such as Paytm have brought different verticals under one umbrella to lower CAC. Do note that edtech firms such as Byju’s may have much higher CAC, which they partially recover when customer buys a course.
Since product and engagement metrics are important for new tech enabled startups, user count is important. IPO bound companies will like to wow investors with user engagement and growth. But the focus should be on active users, or even better, monetizable users.
For example, Paytm uses a metric called MTU (monthly transacting users), which is defined as unique users with at least one successful transaction in a particular calendar month.
Users are counted as monthly active users (MAU) or daily active users (DAU). Facebook, for instance, defines a daily active user as a registered and logged in Facebook user who visited.
Facebook through its website or a mobile device, or used Messenger application, on a given day. Twitter uses monetizable Daily Active Usage or Users (mDAU) as those who logged in or were otherwise authenticated and accessed Twitter on any given day through twitter.com or Twitter applications that can show ads.
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