2012: Internet and Mobile VC investments

<a href=”

” title=”2012: Internet and Mobile VC investments”>2012: Internet and Mobile VC investments

Advertisements

VC investments in Indian E-Commerce

<a href=”

” title=”VC investments in Indian E-Commerce”>VC investments in Indian E-Commerce

IPO valuations and the role of bankers – By Aravind G.R

The Business Insider’s Henry Blodget asks ‘how would you feel if your real estate broker sold your house one day for $1 million to someone (a friend of his, presumably) who turned around and sold it the next day for $2 million.’ You’d be pissed, right, and feel betrayed? Of course you would.

To put it simply, LinkedIn execs sold their shares to ‘some people’ at $45 on Wednesday night, while these people sold it $100 on Thursday morning. Obviously, finger(s) was pointed at the Ibankers who simply “screwed their client out of $130 mn” and charged them $25-30mn to do it.

Before we hang the Ibankers in the middle of the street (while a massive protest at wallstreet continues), lets listen to some of their most probable excuses/arguments and try to debunk them:

1. Mr Banker: How in the world can you expect us to know that the stock price would double to 90+? When we priced at 45, we were told by the same pundits that it was unreal and that we had ‘lost it’

My Take: Agreed, it is very difficult to ‘value’ internet & tech companies, especially lightspeeders like LinkedIn. If you remember, a few years ago Google had no idea about their correct value either, but they pioneered a best practice of ‘Dutch Auction’ to clearly put the ball in investors court and ask them-‘tell me how much you want to buy us at’.

So, Mr Banker’s job would have been easier if he’d trusted his institutional investor buddies to come up with the ‘value’ rather than taking a shot at it in the dark.

2. Mr Banker: No two people value a high growth technology company the same way. Our valuation was close to $45. Live with it.

My Take: We Ibankers are hired to solve this exact problem; we are supposed to get the valuation close to what the market is willing to pay. I understand that underpricing has an inherent advantage and has become sort of an ‘expectation’ from IPO investors. The process of Dutch auction addresses this problem as well.  The fact that you are setting a price band is keeping you in control of pricing rather than the buyer who is bidding against thousands of other bidders for the same share. Price discovery is being stifled a bit, isn’t it?

We boutiques face the same problem, we don’t know if our client should be valued at 10X or 30X of something. But, in the name of god, I wish we had 10 VC funds bidding for the current round. We have done so much better to get closer to a ‘fair’ valuation with just 3-4 VC’s jostling for the same opportunity. Lets face it, we all know how much of termsheet shopping gets done and what a couple of termsheets on the table means to a fund which is looking at the opportunity for the first time.

 

3. Mr Banker: These pundits will be on my case if the price comes down after listing. I’m being ‘just’ to everyone!

My Take: There are enough instances where Ibankers have been accused of screwing the ‘unsuspecting investors’ by selling them a crappy stock at a ridiculous valuation. Can Mr Banker really help this? In India, he is ‘paid’ to ‘maintain’ the price for a few weeks/months after listing. But it is not Mr Banker’s job to see that the stock price is always above the IPO price.  Well, buyers beware, right?

4. Mr Banker: Aha, I’m way more intelligent than you think. I’m doing this to ‘bait’ investors (future ones as well) into believing that the stock is ‘hot’. Investors will not support a stock if it did not ‘pop’ on the listing day; I’m attracting a lot more bids in the IPO because of this and investors will continue to be drawn to stock after Meanwhile this also helps

My Take: Please, diligent investors understand that magical ‘pop’ on listing is not a sudden spike in valuation, but rather a bouncing spring that you had suppressed. The only folks who’d be fooled by this ‘act’ are the media and may be some retail investors. This baiting game will eventually make sure someone bites your hand off, Mr Banker

Why it makes sense for entrepreneurs and VC’s to be ethical– Deepak Srinath

Recently, I was talking to a partner in a top VC fund about why the fund had passed a particular investment opportunity. The startup we were discussing had created a lot of buzz, revenues were growing faster than their competitors and the founding team was aggressive and impressive. The partner replied that the fund had decided not to invest because they were not comfortable with the ‘moral compass’ of the founders. Investors often find themselves in a dilemma about the ‘moral compass’ of founders, i.e, the innate sense of ethical right or wrong on the basis of which an individual makes business decisions.

As an I-banker I’ve encountered plenty of entrepreneurs with dodgy moral compasses. The misdemeanors range from showing inflated sales numbers to shortchanging customers intentionally. There are times when I’ve even had serious doubts about an entrepreneur’s intention of using VC money for the right purpose. With some entrepreneurs its just a gut feel that something is amiss even if you can’t put a finger on it.

Conversely, I’ve been in situations that have exposed the moral compass of funds. A couple of years ago, we were in the process of raising funds for an internet firm.  A VC showed great interest in our client and we shared all the data on the business with them. A couple of weeks later, we found out that the VC had issued a termsheet to a close competitor of our client. One can argue that this situation is normal- A VC will evaluate all the players in a space and make a decision on whom to invest in. This is perfectly fine and part of the VC game.  However, a few days later when our client happened to meet the CEO of the firm the VC had decided invest in, he was shocked to discover that his competitor seemed to know everything about his numbers and growth strategy. Clearly, the data we had shared with the VC had found its way to the firm’s competitor.

In an industry that is more often than not on thin ice when it comes to ethics, why is it so important to possess the right moral compass? I think its not just about taking a moral high ground; it actually makes solid business sense to do so. The world of Entrepreneurship and Venture capital is a relatively close-knit and well informed group, especially with social media and blogs disseminating stories instantly. The best entrepreneurs will never want to raise money from an investor with a dodgy track record. Similarly, an entrepreneur who cuts corners will get caught out sooner rather than later and will never be able to raise a follow on round or attract the best talent, leave alone build a scalable and sustainable business.

I hope the anti corruption fervor in Indian society spills over to the entrepreneurial and investing world too. What do you think?

The Goldspot syndrome of net advertising – By S.V. Krishna*

I frequent a kirana store, where the same Goldspot- the old fizzy orange drink- advert remains painted on its wall for the last twenty five years. This advert is neither targeting an audience nor is it creating brand awareness. But it has succeeded in creating some bit of nostalgia for people of my generation. But it is a plain (damn) uneasy feeling- I was not too fond of the soda; and to make it worse the advert reminded me of punishment in school and cricket matches televised with only one camera.

Thankfully times have changed, but not the functionality of it. The Goldspot syndrome has taken over the net. I was so pissed off with soda based internet advertising. Adverts that showed on websites seemed similar to the queries I had made on Google and I would see the same companies again and again. I wonder why were publishers selling their inventory to static banners on the net and I bet the companies advertising did not see any return on their investment for such banners.

To make it worse- If I made a query on logistics- I would see a host of company adverts that did only logistics. I did not get what I wanted. Suddenly one day I was surfing the Disney website for a package and what did I find as I went in to another site- I found a customised Disney package waiting for me to grab. What frightened me was that the package was customised to my needs.

Curiously I began asking my friends in the adnetwork world as to what was happening. A couple of them said that real time bidding for inventory coupled with predictive analysis of user behaviour was becoming the next best thing for advertising on the net. I am certain that this kind of targeted advertising will create better RoI for the advertiser.

Are there companies trying this? I can think of one company that has already done this and its business model is based on technology licensing plus revenue share of a sale made based on predictions. Firms that made a business out of licensing ad serving platform are going to become redundant in this new world unless they build smart targeting tools and sophisticated data analytics algorithms. The smarter Ad network firms are all scrambling to build tools with lots of data analytics and predictive algorithms.

The world of the net is getting deeper and this sort of business can be scaled up. Then there is so much data on user behaviour that advertising online is going t change drastically if one knew what to do with it. VCs will invest in such companies.

The kirana store is finally repainting his store, certainly the net does not want to be stuck in this Goldspot syndrome forever.

(*S.V. Krishna is a journalist who has worked with some of the leading Business Publications in India. He is a guest blogger for Viedea)

%d bloggers like this: