The crash in the Paytm share almost immediately after listing should serve as a warning to all small investors who went by the popularity of the brand name in everyday transactions. The issue was subscribed 1.89 times the offer value, but the share crashed 27 per cent on the day of listing.

The issue was saved by qualified institutional buyers, even as retail investors bid 1.66 times the shares allotted to their category. High net worth investors stayed away. In short, the smart money largely gave Paytm a miss, while the not-so-smart retail investor went by the assumption that such a big brand cannot fail.

But let’s be clear, who is the really smart money investor will depend on how the Paytm business model — which is still evolving — plays out over the next five to 10 years, and not on what is happening to its share right now. It is worth remembering that even the Infosys IPO was struggling for full subscription in the early 1990s as investors were not sure how its business model would actually play out.

This is not to suggest in any way that Paytm’s business model will work just fine, but if you have invested in the share because you thought it was sure-fire way to instant listing gains, you would have been dead wrong.

Paytm is really a bet on two things: the vision of the founders, who have invested aggressively to build a brand with wide retail and merchant reach; and two, the likelihood that this brand will either succeed big, or, if it fails, will get absorbed by a bigger brand at some point. In any case, it was a long shot investment, one with the potential for huge gains or huge losses, based on how the business model works.

But before we draw the lessons, let me start with a personal disclosure: This writer invested in the IPO and also bought a few shares after they crashed. I am prepared to hold Paytm for five or 10 years, and willing to take a total writeoff if my bet is wrong.

The lessons for retail investors who cannot afford to take these kinds of risks are simple.

First, trying to buy shares for listing gains is not worth it, for even if you get a small allotment it is simply not worth the gains, which will be small. You gain big only if the over-subscription is small, and the share suddenly finds a lot of eager investors for some reason or the other.

Second, if keeping your capital intact is important to you, such IPOs, especially of over-hyped tech or fintech shares, is not for you. You can lose your entire investment, regardless of whether you got allotments during the IPO or bought the share after listing.

Third, in tech, business models are still evolving, and will guzzle more cash in the years ahead. This is because the logic of a platform business is scale, and often the revenue model depends on the scale and how soon you are able to monetise that scale and use the data you have to your advantage.

In the 1990s, most analysts were not happy even with Amazon’s constant need for investor money and failure to provide a return on equity, and Paytm too could be needing constant infusions of capital to grow. (Note: I am not trying to imply that Paytm is like Amazon in the 1990s here).

The reason for this is the emergence of large pools of easy capital for startups with bright ideas, and also the possibility of building scale before margins and profitability arrive. In the platforms business, scale often has to precede profitability, for it is the sheer number of uses and monetisable customers that capital is looking for.

In the Indian payments space, the big three are Google Pay, PhonePe and Paytm, and only Paytm is a bank that could evolve into something bigger if regulations ease up. The money will come, assuming Vijay Shekhar Sharma and his management team gets it right, and builds profitability into whichever area of the fintech space he grows.

It is as much a bet on the man as in the business model.

Infosys IPO

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