What Is a Venture Capital-Backed IPO? Why VC-Backed IPOs Are Different
Blog by Aliceblue News Desk
22 May 2026
13 minutes
Most people who applied for Zomato’s IPO in July 2021 did so because they ordered food on the app. That is a perfectly human reason. But the people who made the real money on that listing, Info Edge, Sequoia Capital, Ant Group, they were not applying. They had already been inside the company for years. The IPO was their exit door.
That gap between the insider and the retail investor is what a VC-backed IPO is really about. If you do not understand it before applying, you are sitting down at a card table without knowing who dealt the cards.
What Is a Venture Capital-Backed IPO?
Venture capital is money that professional investment firms put into startups very early, when the business is still unproven, and the outcome is uncertain. In exchange for that early risk, they take a significant ownership stake at a low price.
Years later, when the startup has grown large enough, it goes public on a stock exchange. That listing is the IPO, a process where a private company offers its shares to the public for the first time. For the VC firm, the IPO is payday. They sell their shares to the public at a price many times what they originally paid.
The company may also issue new shares to raise capital for its own growth. But a large portion of many VC-backed IPOs is simply early investors cashing out. That is the part most retail investors miss. If you are new to how an IPO works. The basics are worth understanding before going further.
How a Startup Goes From Seed Funding to a Stock Exchange
Before you can read a VC-backed IPO properly, you need to know what happened in the years before listing day.
Seed Stage: A VC firm writes the company’s first cheque, often in exchange for a 10 to 20 per cent stake at a very low per-share price. The business may have nothing more than an idea and a founding team.
Series A: The startup has proved some early users or revenue. A VC firm invests a larger amount to fund the first phase of growth.
Series B and C: The company is scaling. Bigger VC firms and private equity funds come in with hundreds of crores. Each round happens at a higher valuation than the last because the company is now less risky than it was at the start.
Pre-IPO Round: The company is large enough to consider listing. Investors in this round sometimes enter just one to two years before the IPO, at valuations already very close to what the public will be asked to pay.
IPO: The company lists. Early investors sell. New investors buy. The cycle completes.
The price you see on IPO day is not a fresh number. It is the result of every round that came before it, each one pushing more value into the share price. By the time it reaches you, the easy returns have already been made.
What VCs Are Actually Doing Behind the Scenes
A VC firm that invests ₹100 crore in a startup does not just sit and wait. It takes a board seat. It influences decisions. In the years leading up to an IPO, its involvement becomes very specific.
The firm pushes the company to build the governance structures SEBI requires before listing. It helps recruit the CFO and legal team that will handle the paperwork. It sits in the room when the Draft Red Herring Prospectus is written and has a direct say in how the company’s story is told to public investors.
During roadshows, VC partners often travel with the founders to pitch institutional investors. When the price band is set, the VC’s target return is factored into that number.
None of this is hidden. But it is rarely explained. When you read a DRHP, you are reading a document where the company and its most powerful shareholders have had significant input. Keep that in mind when you reach the valuation section.
How the Actual IPO Process Works
- Filing the DRHP with SEBI
Every IPO starts with the Draft Red Herring Prospectus. It is public, and you can download it from SEBI’s website. The shareholding table tells you exactly how much each VC firm owns and whether they are selling in this IPO. That table is more useful than any grey market premium figure. To understand what SEBI requires companies to disclose before listing, Alice Blue’s blog on SEBI IPO regulations cover the disclosure rules in detail. - SEBI’s Review
SEBI goes through the DRHP and can ask for clarifications or additional disclosures before approving the listing. - Price Band Announcement
The company and its bankers set a price range based on the company’s financials, what comparable listed companies trade at, and the return targets of existing investors. All three of those inputs are in the room at the same time. - Subscription Window
The IPO stays open for three days. QIBs, HNIs, and retail investors each have separate portions reserved for them. When the subscription window closes, the numbers that come out, how many times the QIB portion was subscribed, how many times retail, can be confusing if you have not seen them before. Alice Blue’s blog on IPO subscription status explains what those figures actually mean. - Allotment and Listing
Shares are allotted based on oversubscription. The stock is listed on BSE and NSE, and free trading begins. - Lock-in Expiry
VC investors who did not sell during the IPO are subject to lock-in periods under SEBI’s ICDR Regulations. Equity shares held by a registered venture capital fund or Category I AIF are exempt from the standard pre-issue lock-in only if those shares were held for at least one year before the IPO filing date. If not, a six-month post-IPO lock-in applies. Promoters face an 18-month post-listing lock-in following SEBI’s April 2022 amendment that reduced it from three years.
Zomato: What the Numbers Actually Show
Info Edge first invested in Zomato in 2010. By the time of the 2021 IPO, Info Edge had built its stake at an average cost of ₹1.16 per share.
Zomato’s IPO was priced at ₹76 per share. The total raise was ₹9,375 crore, of which ₹9,000 crore was a fresh issue for the company and ₹375 crore was an Offer for Sale by Info Edge.
At ₹76 per share, Info Edge was sitting on roughly 65 times its average cost. Sequoia Capital, which had invested approximately ₹300 crore across its investment rounds, was looking at a return of around 12.5 times at the same IPO price.
Zomato opened on listing day at ₹116, a 52 per cent premium over the issue price. The investors who applied at ₹76 did well. The investors who bought at ₹116 on the listing day paid a materially different price, and the stock later corrected below even the IPO price.
Two groups of people, same company, very different outcomes. The only difference was the entry price.
Nykaa: The Lock-In Lesson
FSN E-Commerce Ventures raised ₹5,352 crore through its IPO in November 2021 at a price band of ₹1,085 to ₹1,125 per share.
TPG Growth had entered at an average cost of ₹118 per share through the Series E round starting in 2019, investing a total of ₹191 crore. Lighthouse India Fund III also held a significant pre-IPO stake and partially exited through the Offer for Sale.
Nykaa listed at ₹2,001 on BSE and closed its first day at ₹2,206, roughly 96 per cent above the issue price of ₹1,125. For TPG at ₹118 per share, the listing price represented nearly 17 times its money.
Fourteen months later, on November 10, 2022, the lock-in on pre-IPO investor shares expired. On that date, approximately 67 per cent of Nykaa’s total shareholding was freed for open market sale. The stock fell sharply and kept declining for weeks. Retail investors who had held since the IPO and were unaware of the lock-in expiry date watched the price drop without understanding why.
That is the information gap between institutional investors and retail investors in its most visible form.
Key Features Worth Knowing
- Loss-making is common: Many VC-backed startups are burning cash when they list. Revenue growth matters, but so does the direction of cash burn. Check both in the DRHP before applying.
- The valuation has no P/E anchor: Traditional IPOs can be benchmarked against earnings. VC-backed IPOs are often priced on revenue multiples or market size projections. There is no earnings number to divide the price by. You are buying a projection.
- OFS means you are funding someone’s exit: When a large portion of the IPO is an Offer for Sale, the money you pay goes to the selling shareholders. The company itself sees none of it. A startup still losing money and listing with a large OFS is asking you to fund its investors’ exit.
- Grey market premiums are sentiment, not valuation: Nykaa’s IPO was oversubscribed 82 times. That number tells you how many people wanted in. It says nothing about whether the company was worth the asking price. Alice Blue’s blog on grey market premium in IPOs explains why GMP can mislead and how to read it without getting swept up in the excitement.
- Lock-in expiry dates matter: Every VC-backed IPO has a calendar of dates when different shareholder groups can begin selling. Knowing those dates is basic risk management for anyone holding the stock post-listing.
Advantages
- Getting into sectors you cannot access elsewhere: Consumer internet, fintech, quick commerce. These businesses rarely come through traditional IPOs. VC-backed listings are often the only entry point available to retail investors.
- The business has survived multiple rounds of scrutiny: A company that raised a Series A, then B, then C, then a Pre-IPO round has been evaluated by professional investors at every stage. The model has been stress-tested more than a company listing directly for the first time.
- Listing gains are real when the pricing is right: Zomato’s 52 per cent and Nykaa’s 96 per cent listing gains are part of recent Indian market history. When pricing and market conditions align, the gains are material. Neither outcome is guaranteed, but both were real.
- Compounding over time in the right business: Zomato became profitable in 2023. Investors who bought near the issue price of ₹76 and held through the post-listing correction eventually saw the original thesis play out. Entry price and patience both mattered.
Risks
- Overvaluation is baked into the structure: Paytm listed at ₹1,950 on November 18, 2021, against an issue price of ₹2,150. That was a 9.3 per cent loss on Day 1. The stock continued falling for months. When a company is priced assuming everything will go right, there is no room for normal operational friction or market sentiment shifts.
- An OFS-heavy IPO is not raising money for the company: If 60 to 70 per cent of the IPO is Offer for Sale, the fresh capital going into the business is limited. A company still burning cash, listing primarily so its investors can exit, is a different proposition than one listing to fund a specific growth plan.
- Profitability is often not promised: Read the management commentary in the DRHP carefully. If there is no specific guidance on when the company expects to break even, that absence is worth noting.
- Selling pressure after lock-in is not an accident: It happened with Nykaa. It happened with Paytm. It happened with PolicyBazaar. The pattern has repeated enough times in Indian markets that ignoring lock-in expiry dates is poor preparation, not bad luck.
VC-Backed IPO vs Regular IPO
Feature | VC-Backed IPO | Regular IPO |
Stage of the company | Growth-stage startup | Established and mature business |
Profitability at listing | Often loss-making | Usually profitable |
Valuation method | Revenue multiples or TAM-based | Price-to-earnings or asset-based |
OFS component | Typically large | Smaller or absent |
VC influence pre-IPO | High — board, pricing, DRHP | None |
Sector | Tech, fintech, consumer internet | Manufacturing, infra, banking |
Post-listing volatility | Generally higher | Relatively lower |
Mistakes That Cost Retail Investors Money
- Buying because you know the app: Product familiarity is not investment analysis. A business can have 100 million users and still be overvalued at a given share price.
- Not checking the OFS ratio: One line in the DRHP tells you whether this IPO is funding company growth or funding an investor’s exit. Most retail investors never look for it.
- Skipping the risk factors section: The company wrote it. It runs for dozens of pages. It contains direct admissions about losses, regulatory exposure, and competitive threats. Not reading it is a choice with consequences.
- Applying only for the listing gain: Paytm fell 9.3 per cent on Day 1. Investors who had no plan beyond selling on listing day were left holding a loss with no thesis for continuing to hold.
- Not knowing when the lock-in expires: This date is in the prospectus. Mark it in your calendar. If you are still holding a VC-backed stock when that date arrives, be prepared for the selling pressure that typically follows. The Nykaa experience in November 2022 showed exactly what that looks like.
Who Does This Type of IPO Actually Suit
More likely to do well:
- Investors who have read the DRHP and can explain the company’s path to profitability in one sentence
- Those willing to hold for at least three to five years
- Investors who understand the sector and can benchmark the valuation against listed peers
- Those allocating a portion of their portfolio small enough that a 30 to 40 per cent post-listing fall would not force a panic sale
Less likely to do well:
- Investors who need predictable returns or income from their equity portfolio
- Anyone with an investment horizon under two years
- Those making the decision based on subscription figures, grey market premiums, or social media commentary
- First-time investors who have not yet worked through a single IPO prospectus
The Paytm outcome was not a one-off. People who entered at ₹2,150 without a long-term view and without reading the risk disclosures faced losses that took years to recover from.
What SEBI's Lock-In Rules Actually Say
Under SEBI’s ICDR Regulations, shares held by a registered venture capital fund or Category I AIF are exempt from the standard pre-issue lock-in only if those shares were held for at least one year before the IPO filing date. If they were not, a six-month post-listing lock-in for non-promoter pre-issue shareholders applies.
For promoters, the minimum post-IPO lock-in was reduced from three years to 18 months under SEBI’s April 2022 amendment. That change shortened the timeline within which a startup’s founders can begin selling their shares after listing.
Put the lock-in expiry dates in your calendar for any VC-backed stock you own. The Nykaa situation in November 2022 was entirely predictable. The date was published. The percentage of shares under lock-in was public. The only variable was whether retail investors knew to look for it.
Conclusion
VC-backed IPOs are not inherently good or bad investments. They are investments where the information gap between insiders and retail investors is wider than in most other listings. The VC firm has been in the business for years. They know the quarterly numbers, the operational challenges, and exactly what return they are targeting at the IPO price. You are seeing the company for the first time, on a roadshow, at a price the insiders helped set.
That does not mean you should avoid them. Zomato at ₹76 rewarded patient investors. Nykaa at ₹1,125 rewarded those who understood what they owned. In both cases, the investors who did well read the document, understood the OFS, and had a plan that lasted longer than listing day. Before applying to any IPO, running through the financial checks covered in Alice Blue’s blog on factors for a successful IPO and listing will give you a structured starting point.
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