STARTUPS
2016—the year of discounted valuations
The speculation is about which two will first join hands in 2016 to compete with the US leader—Amazon—that has doubled in market cap in the last year and remains the formidable force to reckon with. Photo: Bloomberg

The speculation is about which two will first join hands in 2016 to compete with the US leader—Amazon—that has doubled in market cap in the last year and remains the formidable force to reckon with. Photo: Bloomberg

2015 was the year of discounted products. 2016 will be the year of discounted valuations. When will be the year of discounted cash flows?

When I was in Silicon Valley in January 2015, the thought of Indian e-commerce companies skating on thin ice was dismissed off as unfounded cynicism. The e-commerce veterans in Silicon Valley could not get enough of the Indian e-commerce growth. The excesses were part and parcel of any early-stage winner-take-all network-effects business vying for the big prize in a hyper-competitive market.

I started the new year in Silicon Valley again this year and the outlook is different in January 2016. The scepticism around hyper-funded Indian e-commerce start-ups seems as pervasive as the exuberance a year ago. Their indefensible position against US or Chinese equivalents seems beyond reasonable doubt. The speculation is no more about who will be the first to the top, but about who will be the first to fall and how. The speculation is about which two will first join hands in 2016 to compete with the US leader—Amazon—that has doubled in market cap in the last year and remains the formidable force to reckon with. The speculation is about which one will be acquired by the Chinese equivalent who considers India as the extended Asian battlefield in the territorial war. There is agreement that something’s going to give in 2016, and the speculation of what and how has begun 10,000 miles away.

And it’s different from how Silicon Valley looks at itself. The Valley took responsibility for the dot-com bubble of 2000 and now knows better. Wall Street took responsibility for the 2008 financial crisis and now knows better. They are both ready to take responsibility for the way Nasdaq has begun in 2016—down 10% since the start of the year. Yet, there is a quiet comfort about business as usual. These are movies they have seen before. They are on an upgraded version of the old software called portfolio theory. A theory that is inseparable from the business of investing in innovation. Most start-ups will fail and some will gain so much that it washes off the losses of the failures and then some. So will be with the unicorns. Some unicorns will fail and some will change the world all over again. They just cannot agree on which unicorn is in which bucket. Yet, India is different. For those in Silicon Valley, India is like the Valley during the 1999-2000 dot-com bubble. The gravity-defying economics of India seems different from the portfolio chess of unicorns. Here’s how.

In The Golden Tap: The Inside Story of Hyper-Funded Indian Startups, I borrowed Peter Thiel’s definition of innovation versus globalization and labelled Silicon Valley tech start-ups as innovation plays and hyper-funded Indian start-ups as globalization plays. Uber invented how you can get a ride at the push of a button. Ola localized the idea to make it work under Indian conditions. During his visit to IIT Bombay last week, Uber CEO Travis Kalanick revealed an alternate way of looking at this. He conjectured that in the changing world order, the three Bs—Bay Area, Beijing and Bangalore—will be the hubs for innovation. And then he gave a backhanded compliment to the Chinese for inventing subsidies. By that token, Bengaluru borrows the product innovation of Bay Area and subsidy innovation of Beijing, and tops it off with local innovation for India. The heat that makes this soup boil is the money from global investors and public companies that believe in the innovations and that they apply to India at scale. The investment thesis is to keep burning money until you are the last man standing. All Indian unicorns belong to that bucket. And there is no portfolio theory about that.

When Silicon Valley used the same lens as it does for US start-ups, India looked awesome last year. When China used the same lens as it does for Chinese start-ups, India looked awesome last year. As they spot the differences, the lenses are slowly coming off and new beliefs are being formed. How these conglomerates and investors operate in India will depend on these new sets of belief. The trouble with Indian entrepreneurs and investors though is that we have been at the mercy of others’ beliefs. The quicker we are master of our own creations than followers of others, we can start to innovate beyond localization. Till then, the investors will enjoy the deep discounts that consumers enjoyed last year. Bring your popcorn and grab a seat.

Kashyap Deorah is the author of The Golden Tap: The Inside Story of Hyper-Funded Indian Startups. He is an entrepreneur and investor who shuttles between India and Silicon Valley.

[“source-Livemint”]

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