It's Raining Money!- (22 August 2021)

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The Great Flood in Startup Town

Venture Capital funding for Indian startups reached a 6 year high in the first half of 2021, with USD 12.1 billion.

In the past, given the streak of startup unprofitability, the public markets were reluctant to participate, and the likes of Tiger Global had to wait for several years for their Indian investments to pay off. With Zomato's blockbuster listing, now Indian investors are looking beyond the traditional profitability metrics. Currently, internet stocks make up for less than 1% of Indian listed markets, compared to 25% for USA and China. Long way to go!

Interestingly though, the Indian internet companies have bagged higher valuation multiples compared to their Chinese or American peers. Zomato, the new poster boy, commands an EV/Sales multiple that is twice that of Doordash (USA) or that of Meitun (China).

OUR TAKE

Covid-driven digital adoption has created stronger fundamentals for the start ups to build their business models and use VC funding to flourish. Public markets wait for baited breath to invest in such opportunities. But with higher valuations come greater risks, and longer holding horizons. Public market investors would do well to keep this in mind as they allocate capital.

 

Cloudy with a Chance of Higher Risk

 

The rent we earn on our money is the lowest ever. Worries of rising inflation are pushing investors on the adventurous path to explore the high yielding avenues. The search for higher yield has sometimes ended terribly.

Much before zero rates were in vogue, Japan’s central bank carried out an interesting experiment of setting rates to zero. There was a natural temptation for the Japanese investors to look for other economies with higher interest rates and many banks came up with such currency centered investment products.

A new group of investors emerged in Japan. Among them were the housewives, so much so that they got their own moniker: Mrs. Watanabe, to describe this group collectively. In 2008, when the Yen rose as high as 80 per dollar, Mrs Watanabe and others lost hundreds of billions of dollars.

OUR TAKE

We see low yields as a good opportunity for the asset management industry to come up with innovative risk sensitive investing solutions. Since abundant supply of money is chasing limited opportunities, right due diligence while designing such solutions becomes very important. Further, educating the investor on risk involved in such investment avenues is a prime responsibility of the advisors.

 

Carry an Umbrella, Maybe?

"I try to keep two things in mind in a world that's fragile to chance.

One is to base your predictions on how people behave vs. specific events. Predicting what the world will look like in, say, 2050, is just impossible. But predicting that people will still respond to greed, fear, opportunity, exploitation, risk, uncertainty, tribal affiliations and social persuasion in the same way is a bet I’d take.

 Another – made so starkly in the last year and a half – is that no matter what the world looks like today, and what seems obvious today, everything can change tomorrow because of some tiny accident no one’s thinking about. Events, like money, compound. And the central feature of compounding is that it’s never intuitive how big something can grow from a small beginning."

 

Mango Showers

 

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