Rejoice, 'tis the season of high valuations!

Inflated valuations? No problem. It is a good thing actually and demonstrates entrepreneurship financing is maturing

Sachin Joneja

[Photograph by Tim under Creative Commons]

Business news viewers are often greeted by a strange sight. Seasoned veterans watching twenty-something aspiring entrepreneurs confidently, "pitching" business plans and asking for investments. On offer is a minority stake in the proposed business.

Even more surprising still is these veterans actually bid for how low a stake they are willing to settle for. The seasoned businessman, the investor, the capital provider, actually works hard to justify that these young entrepreneurs ought to take their money.

Will this endure? An example from the past ought to answer that question. When Nasscom first put out the estimate of $100 billion as export revenues from software, people laughed. They thought it impossible the industry can become 6-8% of GDP.

So, will Indian e-commerce get big? Yes. Will there be busts and booms along the way? Yes. But for now, let us celebrate the energy. And celebrate that instead of having to go to Nasdaq  for a listing, global capital providers are right here. And if Indian Very High Net Worth Individual (VHNWI) capital wants to participate, they need to come in at these "crazy" valuations. That's not going to change.

The financing of this is itself a revolution of sorts. Because shorn of all jargon, the financing of new ideas is a negotiation between the capital provider and the entrepreneurial team. Who has the upper hand is determined by options available to both parties. The more the competition between people willing to back the entrepreneurial team, the lesser they have to give out as equity. Until very recently, it was always the guys with capital that had the upper hand. Today, qualified people with a plan have options and can negotiate from a position of strength.

For those of us who been in the equity markets, this transformation has been a long time coming. We have looked wistfully at the US and its Venture Capital industry since the dot com days and wondered when such a market for ideas will emerge in India. It seems to have arrived.

While it came in as an imported phenomenon with global capital seeking returns in India, local capital has jumped in as well. On offer are incubators and accelerators to funds that provide successful senior executives the support they need to replicate their earlier successes.

This phenomenon is driven by demand for rapidly scalable businesses to fund or mentor. Global investors looking for the next Amazon, the next Alibaba, the next Infosys, the next everything. Large companies world wide are looking for the next big thing in their industry. We are importing the hoopla - along with what some would call crazy valuations - from beyond our shores!

This import takes many forms. At one level, seasoned businessmen and investors are willing to back people they think can create the next Flipkart. Why? Because otherwise they lose the deal. Good on all the entrepreneurs and aspiring entrepreneurs. And good for all the start-ups incubators and accelerators.

Another form this takes is that it creates a group of wealthy individuals who want to see if they can hop on for the ride again and "guide" some other start up and do it all over again. Why? Again, because the market at the top end exists and it can be done. Take away that market and the capital will again either seek safer investments in areas like real estate or a higher stake in the new business at a lower valuation.  

As global companies realise that if they hope to get an inside track into new ideas and innovations in their industry, they need to set up shop as investors themselves. This trend has been given a new moniker - Corporate Venturing. Two things are particularly heartening in this context. First, that a large number of marquee global companies have set up an India arm. Microsoft, Amazon, Google, Intel, for instance. Second, all leading Indian software companies are in the process of setting up Corporate Venture arms.

People insist that this is a sliver of India's economy that will not impact anything else. By way of evidence, they point to how shallow our traditional businesses are. Sure, a lot still needs to be done. But let me just say that even for a traditional industry like automobiles, General Motors Ventures, Ford Motor Ventures, Toyota Ventures, Daimler Ventures, Honda Ventures, Bosch Ventures all exist and are very active. Again GE Ventures and Siemens Ventures also exist and are active. It is a matter of time before the dynamic of enterprise versus capital shifts in favour of enterprise even in those sectors.

So yes I concede that there is a long way to go.

But for now, I insist, let us celebrate.

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About the author

Sachin Joneja
Sachin Joneja

Independent Consultant

Sachin Joneja has been a part of the Indian equity markets—in one capacity or the other—from when the Sensex was in three digits. His career has grown and evolved with the markets. From 1989 to 1999, he conceptualised and led the creation of equity research departments for two companies—first for Champaklal Investment and Financial Consultancy Ltd, one of the original big four merchant banks of the pre-liberalisation era and then in the post liberalisation era for the stock broking subsidiary of ITC Classic Finance Ltd.

Since then he has been an independent consultant in the venture capital and private and corporate investment areas. Initially, he worked largely with the internal team at Reliance Industries Ltd to help them strategise and evaluate investments in companies in the software domain. Later, he moved to looking at the electric vehicle and alternate energy space and advised high technology start-ups from overseas interested in opportunities in the Indian market.

He is fascinated with the interplay of entrepreneurial ideas and energy on the one hand and capital—including state capital—on the other and how they shape the market for risk capital and control. Sachin has evolved sharp insights into what it would take to develop a strong high-tech entrepreneurship ecosystem and how to remove the current barriers that are preventing it from taking shape. He is also deeply interested in the role that modern corporate venturing models and sovereign wealth fund type investment structures can play in deepening the entrepreneurial ecosystem in India.

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