Here’s why the shares of small businesses sell at inflated prices

livemint.com:

Lombard Street: A Description of the Money Market details the dubious purposes for which businesses sought to raise funds: “To make Salt Water Fresh… For building of Hospitals for Bastard Children… For trading in Human Hair… For a Wheel of Perpetual Motion." But the most audacious was: “For an Undertaking which shall in due time be revealed." We no longer live in the 18th century and such blatant fraud is not usually possible today. However, in the 1990s, merchant bankers did inflate the value of many dotcom companies with barely any business prospects, projecting a prosperous future to sell retail investors these shares at excessive valuations. If merchant bankers had made a habit of refusing such deals, much of the dotcom bubble might never have occurred.

Of course, no merchant banker ever went to jail for selling shares priced too high. If they had, the concept of company shares being listed and investors bearing limited liability may not have taken off and capitalism as we know it would never have existed. A similar scenario has unfolded in India in the 2020s.

Shares of several venture capital-funded firms with minimal business models have been sold to investors at extremely high valuations. Part of this ‘dressing up’ involves presenting improved figures in the lead-up to an IPO. Chartered accountants and merchant bankers play a crucial role in producing numbers that make these companies appear much stronger than they actually are.

Of course, this is only part of the story, as the supply of shares being sold through IPOs also depends on their demand. In fact, investors typically buy stocks only after a substantial market rise. This trend appears to be occurring in the SME IPO space as well.