The perspective of startup listing on stock market

Although role models are highly profitable companies, most startups pursuing digital opportunities in less developed countries have been accumulating losses. As early-stage investors are reluctant to offer additional funds and "foreign investors" are desperate to find an exit, less informed investors have become targets to offload shares of these loss-making ventures. However, "existing rules do not allow listing of a loss-making company without sufficient tangible assets." Consequently, according to a media report, among more than 1,000 startups in Bangladesh, "no startups and tech-based companies have been able to raise funds from the primary market." Hence, a process is underway to change rules for allowing the listing of loss-making startups in the local stock market. What is the purpose? Is it a rational act?
Startups are after ideas of reinvention for creating new wealth and markets through creative destruction. As they are after leveraging emerging technology cores, their offering begins the journey as inferior alternatives, facing rejection from the mainstream market. Hence, invariably, they suffer from loss-making revenue in the early stage of the life cycle of their products. To reach profit, their challenge has been to create a quality-enhancing and cost-reducing flow of ideas. Although often-cited startup success stories are outcome of this idea flow, most startups in the digital age, notably in less developed countries, are after subsidies to keep afloat their operations. As accumulated loss keeps rising with a bleak hope of reaching a profit, early-stage investors are desperate to find an exit.
Does it mean that early-stage investors are after alluring less informed general investors to buy stock of startups in which they have lost hope? Or is the subsidy needed for scalability beyond their funding abilities? If we answer yes, where is the rationality of opening the door to alluring general investors of less developed countries to offer exit to early-stage investors?
We need to take a deeper look to place the subject in perspective. As Nikolai Dmitriyevich Kondratiev observed, economic long waves are the driving force of prosperity and income. Subsequently, Joseph Alois Schumpeter investigated and found creative destruction as the underlying force fueling the formation of those waves. Due to riding long waves, UK-led Europe became the driver of the first industrial revolution and an economic powerhouse. Subsequently, the USA became a role model that fueled several long waves to reach and sustain economic supremacy. Besides, natural resource-poor Japan, Taiwan, and South Korea reached high-income status due to leveraging the US and Europe invented long waves, notably created through semiconductors, consumer electronics, and automobiles. To our surprise, as opposed to influential firms, startups have been the actors in pursuing creative destruction to fuel those long waves. According to some studies, seven out of ten creative destruction waves have so far been driven by tiny new entrants, startups. Hence, contemporary development thinking has been referring to the vital role of startups in driving economic growth and raising nations to high-income status.
Despite the immense importance of startups in creating new wealth and driving resource-poor nations to high-income status through a flow of ideas, are startups in less developed countries showing such a pathway? After years of funding, why are most tech startups in less developed countries suffering from losses? Why can they not profit from the money, knowledge, and connections flowing from highly competent foreign investors? To get answers to these and a few other pertinent questions, let's look into the matter.
STARTUP SUCCESS STORIES: In justifying the listing of loss-making startups to raise funds from the stock market, success stories that are often cited are Apple, Microsoft, Sony, Google, Nvidia, and others. Many of the startup role models reached profit within ten years. Instead of offering subsidies to grow the customer base, they focused on refining their innovations to improve the quality and reduce cost. Such a reality raises vital questions about listing loss making startups.
QUALIFYING FOR STARTUPS: How to define startups is an issue. Should any newly born company pursuing the idea of integrating technology into conventional business qualify as a startup? Should we offer tax and other incentives to all these companies? For example, if a spare parts maker shows up with a 3D metal printer, will it qualify as a startup and enjoy all kinds of tax benefits and grants? If so, will we destroy the business of many existing firms that produce similar products?
QUESTIONABLE SCALABILITY APPROACH: Of course, startup successes are rooted in offering a larger scale. However, what is the core strength of scalability? Is it about buying customers, destroying competition through providing subsidies, and setting up large operations to show scale effect? For sure, no. Apple, Intel, Sony, Microsoft, Google, and many others got the scale effect by refining their innovations, making them increasingly better and cheaper. Where is the demonstration of such a vital ability in local startups to reduce their losses?
REASONS FOR LISTING LOSS-MAKING STARTUPS: Among more than 1000 startups, there has been no robust role model for reaching profit through innovation enhancement. The underlying thesis has been to burn investors' funds to offer subsidies for showing scale effect, inflating valuation, and increasing accumulated loss. It seems that investors have been losing hope in such a thesis. Hence, funding has been drying up, and early-stage investors are desperate to encash their shareholding in these startups. Therefore, after changing the rules, they are after opening the door to giving exit, notably to foreign investors.
ADDITIONAL FUNDING RISK: As loss accumulates, if startups keep pursuing subsidies to capture more customers, additional funding flow may worsen the situation. First of all, it creates distortion in the competition space. Second, listing of loss-making startups just offers exit paths to foreign investors to repatriate their ownership by transferring non-profitable assets to less informed local investors. Most importantly, instead of creating new wealth, such an exercise will likely do the opposite.
RESPONSIBILITY FOR PROTECTING AND INFORMING GENERAL INVESTORS: Policymakers and regulators have an essential role in allowing the listing of only those companies that create wealth and offer profit-making investment opportunities to the public. As general investors are not very knowledgeable about what it takes for a loss-making startup to reach profit, policymakers and regulators should bear the responsibility. As none of the more than 1000 startups have reached a healthy, profitable situation, should there be a question about the financial viability of this cohort?
RISK OF WRONGLY BRANDING STARTUPS: As mentioned, startups are at the core of new wealth creation. However, despite global success stories, there have not been any such example in many less developed countries. Unlike their role models, instead of creating wealth through a flow of ideas, startups in the digital space in less developed countries are after subsidies for causing market distortion, increasing customers, increasing valuation, and raising accumulated loss. Scaling up such a thesis through listing in the stock market runs the risk of wrongly branding startups to future generations.
Of course, we must tap into startups to drive a creative wave of destruction for creating new wealth, growing investment, and forming new markets. Unfortunately, the present thesis of foreign investment led startups in less developed countries is yet to show such examples. As more than a billion-dollar investment, a high-level knowledge base, and strong connections of foreign investors are yet to demonstrate the graduation of a few of more than 1000 startups into profitable ventures. Such a reality raises a vital question: is listing loss-making startups in the stock market an exercise of giving window to foreign investors to offload "non-performing assets" to less informed general investors? Hence, instead of changing the rules and giving foreign early-stage investors an exit by allowing them to offload shares of loss-making startups in the local stock market, we should encourage them to show the success model of turning digital ideas into profitable businesses and get their highly profitable ventures listed.

M. Rokonuzzaman, Ph.D is academic and researcher on technology, innovation and policy. [email protected]