Startups, Venture and Angel Investors!

I am venturing into an area where even angels are afraid to tread! For a long time, I have felt lost with the terms mentioned in the title. To my understanding as an oldie, anyone starting a new business is a start-up. Investopedia definition of a startup is below:

A startup is a young company that is just beginning to develop. Startups are usually small and initially financed and operated by a handful of founders or one individual. These companies offer a product or service that is not currently being provided elsewhere in the market, or that the founders believe is being offered in an inferior manner. 

If we go by the strict definition of startups then the names like Uber, Airbnb, Zomato, Oyo and their likes come to mind. These companies have provided a service or a facility which was never offered before. These facilities became possible because of the internet and IT. I wont call Tesla a startup because they are providing a variant of an existing product; that variant is no doubt a game changer as it will change and push the Petroleum economy. But the car itself is not a game changer. 

 

Unicorn1I read a news item today which said that Delhivery a startup has become a Unicorn company. Unicorn is a mythical animal depicted from thousands of years and appears unique; maybe that is the reason this name Unicorn, a unique company. Unicorn company is defined as a company whose valuation as per markets is One billion (One thousand million) US $, i.e. Rs Seven thousand crores. As a semi-retired person nearing 70, I feel out of depth to read such figures. But for records, all my life I have run a business (a dirty secret- a software business) and had consulting assignments. In both my activities, I have dealt with companies from a couple of billion dollars to nearly 40 billion dollars. So, these numbers don’t scare me, but personally these days I go to an ATM to withdraw money for myself, I am a small man.  

Many of these Unicorn companies have been based on the internet, and IT technologies but some of them are doing the work of brick and mortar things as mere mortals do. Here is a table that I got on the net and made me start thinking. 

US $ Million  Revenue 2018 Funding   Valuation  R/F  R/V  F/V 
BYJU  219  784  4000  0.28  0.055  0.196 
Swiggy  72  1500  3300  0.048  0.022  0.455 
Zomato  47  653  2500  0.072  0.019  0.26 
PayTM  51  2200  10000  0.023  0.005  0.22 
Oyo  400  1600  5000  0.25  0.08  0.32 
Policy Bazar  62  35  1000  1.77  0.062  0.035 
Udaan  4  285  1000  0.014  0.004  0.285 
Freshworks  14.5  249  1500  0.058  0.010  0.166 
Delhivery  15  365  1500  0.041  0.010  0.243 

 I will briefly mention what they do.  

  • BYJU is in online training– revenue from students 
  • Swiggy and Zomato are restaurant food delivery companies- revenue from the restaurants whose food they pick up and deliver. Tie up with restaurants and menu details is unique 
  • PayTM is a wallet plus allied things company
  • Oyo- helps book hotel rooms and takes money from hotels– this is unique 
  • Policy Bazar- helps you buy many policies online- commission on the sale 
  • Udaan is like Flipkart and sales products online 
  • Freshworks offers sales and support solutions 
  • DelhiveryPhysically delivers goods from place A to place B and has warehousing facilities.  

To me except Oyo, Swiggy and Zomato others do not fit the strictest of the definition. Are other companies providing products and services that did not exist before? No, still they are called startups! By this definition then, like other companies, my company was also a startup and faced the same problems as these companies are facing today. The only difference is that some experts in the world thinks that they are doing something extraordinary!  

As usual, my mind started whirring, and I have questions! What is so unique in becoming a company which some experts” feel is doing fantastic work; they have invested large sums of money in them. For an oldtimer like me what matters is how much I am selling and what is the profit that I make out of the business!  Is the business sustainable over a period of time?

I will introduce two more terms now for better understanding. 

Venture capital firms are investment companies that operate only to handle investments in business ventures that may be considered high risk. 

An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.  

Now that we are through with definitions, tables, please help me solve my queries. When the companies are creating variants of existing available services and products, how do they become startups? These companies are supposedly creating products and services which are not existing. So how do investors and angels analyse them, study them and invest considerable sums in them? Uber concept never existed, Airbnb is a new concept; so in these two cases, the investors seemed to do more right than wrong.  

I have read that more than 90% of startups fail. What could be the reason? The reasons for failures are the same as the reasons for any failed businesses. These are 

  • Lack of focus
  • Lack of motivation 
  • Too much pride and ego; that you were a smart techie does not mean that you can create and run business 
  • Taking advice from wrong people (including advisors brought in by investors) 
  • Lack of general and specific domain knowledge in life finance, operations and marketing 
  • Raising too much money too soon. 
  • Lacking good mentorship  

From what I understand about the world of business, you need experience, maturity. How will young guns have this? Recently I read some story about a 15-year-old who has done something great in creating a platform for short story writers. He has two thousand hits to his short stories! Come on, its not two million hits. I also happen to be a blogger, and I know what hits are and how difficult it is to get them.

Similarly, how can 25 years old be know all? He may be brilliant both in his techie side and convincing the investors about his ideas about which others don’t know much, anyway. How do dollars get converted into a sustainable running company? 

The table above shows all the figures in million US dollars. It shows revenue, money pumped in and valuation! The revenue is tiny when compared to the money invested. Who does the valuation? What is the significance of the appraisal? I will tell you something about valuation. How can an unproven company, with unproven management, product or services with 4/15/14 million dollars have 1.5 billion dollars valuation?  Do investors not understand these things? But since private money is involved, who cares?  Is this gambling, horse racing equivalent?

Apple was the first company whose valuation reached one trillion (I can’t count zeroes) US dollars. But once the US-China trade war started, it appeared that Apple may have problems. Immediately its valuation has come down, now Microsoft is numero uno! Apple valuation with tons of money and great products and with proven track records can come down. The companies listed in the table above are both brick and mortar companies and IT companies with nothing proven. Their valuation is going up and up and up! Any logic? 

Friends I will introduce you to more things. What people called in olden days as an investment, is now called burn rate. These companies burn money, it’s not yours anyway. Then there are serial entrepreneurs a la serial killers! They create startups, burn money (a % goes to own pockets), take the company to a level and start looking for larger companies for merger and acquisition! Someone decides and declares them more valuable. So promoters, investors, angels all make money as a new set of people replaces the old team. The show goes on. Nobody keeps track of what happens to such companies. Since bank funds and financial institution money is not involved nobody cares. No Nirav Modis and Mallyas are created. Start next company and go through the same cycle, make a million or two. The cycle goes on.

The end result of all this is that “Startup Culture starts in your country. The startup language is a new language which most don’t understand and I am sure you have still a lot of questions on the subject discussed, even after you have read this piece!

 

 

 

 

 

 

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Richie Rich!

RIchieRich

 

Richie Rich! This is my favourite comic character, in fact I still read these comics when I get a chance to read them. This kid is from a rich family and has everything that one may dream of. I used to wonder, how hard his family must have worked to reach this stage. Even today I dream of becoming Richie Rich but now there appear to be simpler ways than working hard, slogging all through life!

Nirav Modi has shown us the way of doing these things. This Modus Operandi had started with Harshad Mehta when he got a bogus Rs.200/ crores fixed deposit certificate. This was done in connivance with some bank official from Bank of Karad. The original FD certificate was for Rs.2/ crore and was conveniently changed the certificate to Rs.200/ crores. Using this fictitious certificate Mehta borrowed money from institutions, and rest as they say is history. When you borrow money against a Bank Deposit, it is assumed to be correct one in all respects and loan is simply given against the most liquid asset. Bank of Karad later went into liquidation. Why work  hard when you can cheat? A little jail term and some bad name is ok as long thousands of crores are available to you.

What we all have seen is that real money is created over a period a few generations of consistent efforts and hard work, sometimes a bit of luck also plays part. But during last 50 years, share markets, and IT companies with their very high  valuations and hence their skyrocketing share prices, have created billionaires. But in share markets real billionaires are far and in between. Not like those from IT industry. Classic case is Jeff Bezos, founder of Amazon. Even after 25 years in business, Amazon is constantly in loss, but keeps on doing business, gives deep discounts on products, Bezos is currently the richest person in the world. Some years back he bought iconic Washington Post for US $ 250 million , in all cash deal. These people have huge personal wealth, they have money to pump in business continuously, but their companies are loss making all the time! But at least they are not cheating banks and you and me!

In normal course, non- IT businesses do become bankrupt, fail but in IT industry failed companies on your CV make you special! Venture Capitalists pump more money in your next  ventures. Cheating happened to some extent, like in case of Enron. There are normal cheats but those of the size of Mallya’s and Modi’s were not many. There was a classic case of Chrysler corporation, who were given special loan by US Government. After a couple of years, this loan was repaid! The Chairman, Lee Iacocca at that time made a famous statement. “We borrow the money the old way, we repay it!” This one statement explained the way the business is done, world over, including India !

But with Modi’s and Mallya’s of this world, things are different. In recent years, there is a big list of people, from different sectors of industry like, power, construction and steel. These companies were given such huge loans that they have sucked the banks in trouble because they are all on the verge of bankruptcy. The beauty of current law in India is that the personal assets of the defaulting promoters cannot be attached. So, most are enjoying life as if nothing has happened.  A bankrupt company’s assets were being auctioned. The original promoters had failed to repay Rs.800/ crore. Original promoters took part in the auction and bought the same assets back at Rs.50/ crores; due to declaration of bankruptcy Rs.800/ crores went into thin air! A law was recently modified to stop people from cheating further.

In case of Modi, fraudulent LOU (Letter of undertaking) were issued by Punjab National Bank. Officers from the Bank issued these without any guarantees. This issue came up in January as the suspect officer had retired and when Modi needed fresh LOU’s, the new officer asked for guarantees. Modi’s people said that they had never given any guarantees before. Why they are being asked now? The whole Pandora’s box opened!

There are many checks and balances in the system but those who are supposed to check, break the rules, how to stop such frauds? It seems that the sizes of fraud are increasing in proportion to inflation and lifestyle. With whatever wealth they had,  before fraud, both Modi and Mallya could easily have lived with whatever lifestyle they wanted! But why do something fraudulent? What is enough money? It comes to basic question; how much land does a man need? What does one do with tens of thousands of crores of Rupees? There is a reverse trend started by Bill Gates who is encouraging the superrich to donate their assets because those assets by remaining under control of an individual or organization, remain idle. If these are donated and correctly used, world will be a better place to live.

In case of Modi he has been living in Europe most of the times, in case of Mallya also it is the same! At least at present they are lucky otherwise, when and if they are brought back to India, they will meet the same fate as Sahara Chief, Unitech boss, Jaypee team and now probably D S Kulkarni. What is the thinking of these people? All these people had done reasonably well in life, till they started doing wrong things. What were they trying to achieve? To become biggest in their field? These four groups have cheated individuals like you and me! Many of us have taken loans to buy flats, many have given life’s savings as FD’s after retirement!  Now there is no way for any new infusion of funds; income for these retired people have stopped, and capital is locked!

Let us hope that government of India, irrespective of party in power, continues the good work they are doing. They are ably supported by our courts by giving strongest possible indictment for bad deeds of the suave looking bad guys! But in discussions with some friends, I found that some people have sympathy for the these fraudulent people! They felt that it is just bad luck in their business cycle and people should support such business people. If you are supposed to be doing Rs.10,000/ crores of projects, and cannot raise Rs.50/ crores to repay depositors money, you do not deserve sympathy, they deserve law to take over and may free stay in Tihar jail or jail of your choice!