Why are most of India’s web start-ups not listed on stock exchanges even years after they started?

Despite having at least 10 home-grown unicorns, India’s internet startup sector is not ready to face individual investors in the country.

Of the hundreds of companies set up in India post-2006, making it the world’s third-largest startup hub, just five have been listed on stock exchanges so far.

This number is unlikely to change much over the next few years, experts say.

“A lot of conversations are happening, but my sense is that actual IPOs (initial public offerings) are still some time away,” said Pranjal Srivastava, senior vice-president and head of equity capital markets at ICICI Securities. “Companies are not ready and they need to do a lot more preparation before thinking of an IPO.” Srivastava and his team recently worked on the IPO of online matchmaking firm Matrimony.com – the latest internet company to list in India.

The chatter around IPOs has risen over recent years as private investors look for exit routes. Only a few, like e-commerce unicorn Shopclues and online furniture seller Pepperfry, have so far gone on record about their plans. In contrast, seven Silicon Valley firms went public in just the first three months of 2017.

So what’s stopping Indian entrepreneurs?

Poor financials

Attracting funds from private investors like venture capital firms and private equity funds has not been a challenge. Some of the world’s biggest investors – Tiger Global, Softbank, Sequoia Capital, Kleiner Perkins Caufield & Byers, IDG Capital Partners, and DST Global – have placed bets on Indian startups.

In the six months between January and June, around 450 Indian tech startups raised over $5.56 billion (Rs 36,203 crore) from venture capital firms and private equity funds.

Meanwhile, raising money through IPOs requires a more robust balance sheet.

Unlike venture capital firms and private equity funds who are willing to put in money even at the idea stage, retail investors focus more on revenues and profitability.

“Even if the company is not making profits right now, there needs to be a definitive path towards getting there. And that is the biggest impediment for Indian startups to list,” said Arun Mantena, associate director for valuation advisory at research and advisory firm Aranca.

Varun Kohli, vice-president at startup advisory firm Acquisory, said, “The main challenge we see is lack of consistency in financial performance.”

Most Indian startups are far from reaching break-even. What’s worse, losses run into eye-popping millions.

In financial year 2016, Flipkart, the posterboy of Indian internet firms, posted a net loss of Rs 5,768.8 crore ($882.6 million), 86% higher than a year ago. Snapdeal, the second-largest homegrown e-commerce firm, lost Rs 3,316 crore in the same period, more than double the loss in the previous corresponding period.

Generic business models

Several Indian tech startups have failed to carve out a niche for themselves. From food technology to hyperlocal delivery to hotel bookings, they are often just following the herd.

In 2016, the founder of a Bengaluru-based hyperlocal grocery delivery startup had told Quartz that his and his competitor’s business models, mobile apps, targeted customers, and potential vendors are all the same. And yet he was hopeful of success because “it’s become a game of funding now. Whoever raises more money and can stay in the game for longer will win. The other will run out of cash and eventually shut shop.” The founder had requested anonymity.

While this strategy may work for private investors, retail investors typically look for differentiators that help firms succeed in the long-term, experts said.

“The barriers to entry in several internet businesses are really low,” Aranca’s Mantena said. “Any competitor can come at any time and start the same business and do something better than the existing player and overtake it. No one has patent protection as such.” Mantena cites the example of Flipkart, which started the marketplace model in India in 2008. But four years later, in 2012, Amazon entered the country and is now giving it tough competition.

The market sentiment

On September 11, India saw its latest internet IPO with the listing of Matrimony.com. It took the company 17 years to go public. The over Rs 500 crore IPO, received an enthusiastic response as its offer was oversubscribed 4.41 times.

While this signals a strong investor appetite, experts believe this could well be a one-off.

In September 2015, when Ahmedabad-based e-commerce firm Infibeam received regulatory approval for a Rs 450 crore IPO, there was a lot of excitement, too. However, when the IPO opened, the response was lukewarm. No mutual fund applied for a single share.

This may be due to a lack of faith in e-commerce and not the entire startup ecosystem.

“Investors’ appetite will depend on the sector they [companies] are operating in. Investors will have reservations about some sectors and a liking for others,” Sreedhar Prasad, partner for internet business and startups at KPMG in India.

It doesn’t help many young firms have complex structures intended to circumvent investment norms. This can put off retail investors.

“It will be a challenge to educate investors of what are the positives in the company,” Srivastava of ICICI Securities said.

Where to list?

Among the top reasons cited for the dearth of startup IPOs in India were unfavourable regulations, including rules that measure startups on the same parameters as legacy companies with entirely different business models and growth trajectories.

Over the last few years, though, the Indian government and stock market regulator Securities and Exchange Board of India have worked to make things easier.

The NSE and BSE have also launched separate platforms to list and trade startup shares.

Another thing that has kept entrepreneurs away is the low investor appetite for high-risk young businesses with evolving or business models without precedent.

That has led to rumours that Indian unicorns may eye listing on US-based Nasdaq, which is famous for successful IPOs by new technology startups.

But that may not be the best option, say experts.

“The benefit of listing in India is that a lot of investors will know them [companies] as consumers. It’s a big benefit to list in a geography that understands your business model rather than going to another country and trying to explain to them what you do,” said KPMG India’s Prasad. “Companies catering to consumer needs are geography-centric, (and) may initially find it difficult to make a foreign investor understand the market opportunity.”

Take Matrimony.com, for instance. Its IPO success could largely be attributed to the fact that Indian investors understand the importance of matchmaking, a banker who worked on the IPO said, requesting anonymity. “If this company had tried listing on Nasdaq, they would have not done so well because it would be very hard to explain India’s arranged marriage system and its importance to American investors,” he said.

This article first appeared on Quartz.