DotCom deadpool

Came across this article in Mint titled Dotcom deadpool returns as India’s start-up boom turns to bust

We have covered this topic in detail in the book as well as in many of the blog posts. A small list of these blogs is as under for quick reference:

It is always interesting

Here is an excerpt from the book:

Throwing money at every start-up without proper due diligence would look silly years later. Sachin Tendulkar came from Shardashram Vidyamandir School, but that does not mean that every Shardashram pupil would be picked up by the indian cricket team.

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History repeats …

Look at this interesting article about Indian start-up boom of recent times:

Dotcom deadpool returns as India’s start-up boom turns to bust

Sir John Templeton has famously said, “The four most dangerous words in investing are: ‘This time it’s different’.”

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Grouping the investment themes – a mental short cut

Grouping investment themes together is a mental short cut many investors take. We have seen many examples of such groups, e.g. Asian tigers, emerging markets, frontier markets, mid-cap stocks, suburban real estate, condos, precious metals, infrastructure stocks, BRIC countries, ICE stocks, unicorns (start-ups), e-com start ups – the examples galore.

In the process, all the individual investments are considered to be equally safe. In search of opportunities, investors often forget that the risks could be vastly different. Almost invariably, they land up with the investment options that appear to be “safe” only because these belong to a certain group or a club.

The truth is discovered much later.

By the time the realisation happens, many have highly concentrated portfolios with poor liquidity and high leverage – a lethal combination.

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Hope is a very bad investment strategy

This looks like an interesting development. Another “new” thing has cropped up. Some regional language movies are doing great – low cost and high revenues – amazing success stories and very high RoI (I mean, return on investment). Many investors are looking at the “alternative” investment to “diversify” their portfolios and at the same time earn very high returns.

Even start ups have come up to help people channelise their money into such ventures.

Regional movies are the buzz at crowd-funding startups

This seems to be great for regional movies, at least. There are many talented movie-makers, who could not compete against the mega-star, big-banner movies with deep pockets. Now, they seem to have found their source of funding.

Well, here is the caveat for the investors. This seems to be another case of “too much money, where to invest?” for the investors. Once one has run out of investment options (psychologically, at least), we start searching for newer options.

If you get success in some early investments, please be even more careful. The chances are that you might simply be lucky. However, we love to attribute all the success to our superior abilities – that is a human tendency. This would build your confidence, which eventually turns into overconfidence.

This overconfidence in one’s abilities leads to the search for even more risks. One tends to start looking at something that nobody is looking at – the spirit of adventure in us wants to seize this opportunity. And we leave the shores and dive into the deep seas.

Just as a side note, please check why did you think  of investing in movies? Is it because nobody else was doing it and you wanted to take the early-mover advantage? Or is it just that someone told you this was “exclusive”?

The combination of overconfidence, exclusivity and greed lead us to take interesting decisions.

Let us analyse this option from an investment point of view. Do regional movies make money? Well, yes they do. Do all regional movies make money? No. If we are clear on these two answers, any prudent investor should ask the next question: “How can one identify the next many-making movie? Do I have the capability? Or can I hire someone who has the capability?”

If I cannot identify the next money-spinner or if I do not know someone who can, it is imprudent to put my money on the block. That is not an investment, then. It is hope – a really bad investment strategy.

In the event of an investor recognising one’s inabilities to spot the right investments, the tendency is to look for what is cheap. This could be another trap.

Be careful. Understand the economics of the business before investing your money. If you don’t, stay away. Warren Buffett has famously said, “Invest within your circle of competence. It is not how big the circle is, it is how you define the parameters”.

 

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Unicorns, cockroaches and investment decisions

Forget unicorns – Investors are looking for ‘cockroach’ startups now

The title of the above article is very interesting and enticing. Most people would be interested in reading what a cockroach startup is.

 

I have two observations to offer here:

  1. We love to coin new terms, sometimes only to explain the old. Nifty Fifties, Asian tigers, ICE, TMT, BRICs, BRICS, BRIICS, emerging markets, frontier economies, PIGS, PIIGS, the Fragile Five … the list goes on. Unicorns, cockroaches are also products of such thinking. Read the article and you understand that a unicorn startup is one that guzzles investors’ money in the initial years to achieve very fast growth and scale up to a very large firm, gaining market share in the process. These firms do not make money in the beginning. However, they hold the promise to reward the investors in the long run when it has acquired the lion’s share of the market. On the other hand, a cockroach startup is one that is making money – it is making profit – this is the good old way of doing business. There is a downside to grouping firms or investment opportunities. This is a mental short cut. Many times, money is thrown to a firm belonging to a group simply because, well, it belongs to the particular group. Not every investment opportunity may turn out to be a winner. Investors later discover that many firms that were part of a “so-called elite” group, turned out to be dud investments.
  2. Taking from where we left in the previous bullet point, it seems better sense is prevailing. “In a bull market, everyone becomes an expert. In a bear market, everyone becomes wise.” In 2015, when there was too much money and investors did not know what to do, they threw money at unicorns. Now that capital is getting costlier and scarcer, the question is asked to the same unicorns, “Show me the money”. New money seems to have found a new love – companies that make profits. Very often, when there is too much money at hand, one needs to exercise caution, since this is the time when emotions take over – one feels overconfident, wealthy, safe and tends to take unnecessary risks. Sometimes caution is thrown to the winds and some risks are taken without proper understanding.

Be careful when you see shortcuts, or when there is too much money in your own hands.

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2016 – the year of Unicorns

Alexandra Suich has written an article in The Economist recently titled “The Year of the Unicorn“.

We will take up two points out of the article:

  1. Some of these unicorns are likely to file for IPOs
  2. FOMO (Fear of Mission Out) is a sentiment so common in Silicon Valley that it has its own acronym.

Now, the chances are that most of these Unicorns may not be easily available to Indian investors to invest in, in  spite of the IPOs, one important point comes to mind. At the same time, there could be some other firms that may raise money from the Indian IPO markets.

In the past, especially in the IPOmania, we have witnessed the FOMO phenomenon in India, too.

A word of caution: Be clear why you are investing in these IPOs, if at all. Please do not invest out of FOMO. Do your own analysis or take professional help before signing the cheque.

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