Strategy by putting your money into the current wave of new-age businesses – The New Indian Express

Express news service

In the course of human history, there have been a few defining events that have led to progress at a disruptive rate. The greatest of these disruptions was “industrialization” in the first half of the 19th century. Another such disruptive event was the use of information technology and the creation of a global network, also known as the Internet, which began to gain momentum in the 1990s. We have seen significant changes. because information was more freely available and companies went online. Many new business models appeared, which subsequently led to the famous boom and collapse of “Dot Com”.

At that point there was a great rush to try and consolidate the position. At the top, we heard terms like “eyeball” which is the number of people visiting a website and “burn rate” which means the rate at which the company is making losses, as an indicator of aggression of the business model. Everyone was in a hurry and every attempt was made to increase the valuation of the company in order to cash it. Many did, many were stranded after bankruptcy, and many companies were unable to scale up to be in the account.

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The current wave of new age companies is an extension of the same philosophy of using computers and the Internet to improve and make existing business models more efficient. The difference we see is that there are many companies that have been around for several years that have a proven business model. However, the similarities with the last time concern the focus on increasing valuation and poor financial performance of these companies. While we haven’t reached the eyeball-based assessment stage this time around, there are plenty of companies that are burning money to consolidate market share and aggressively gain customers.

The euphoria in listed stock markets since the March / April 2020 low has had its own effect on these new age companies. As the valuation of listed companies has more than doubled on average, the valuation of unlisted and even start-up companies has increased considerably during this period. We read in the newspapers of significant transactions made by private equity players where they have committed large sums of capital to new businesses or are cashing in on some of their previous investments. The abundance of flows, as reflected in the listed equity market, also prevails in unlisted markets.

The collection of private equity actors can be done either by selling shares to another private equity actor at higher valuations, or by selling part of their entire stake in a company at higher valuations. public via an initial public offering (IPO). Increased strength and increased activity in the markets has led some of the well-known big brands to opt for listing in the recent past.

With strong interest from the investment community in new age companies, the stocks were offered to the public at high valuations. The resulting even higher quotation valuations and significant short-term benefits for early public shareholders further heightened interest in these companies. In this case, it is clear that investors consider “the trend is your friend” and expect stock prices to continue to rise.

Many of these companies, due to the current stage of their life cycle, are not profitable. Some even continue the game of consolidating their position while increasing losses. It is therefore quite uncertain “if” and “when” these companies will realize net profits and have cash flow to pay investors in the form of dividends. In the meantime, investors can only expect share price appreciation as a way to generate returns on their investment.

While it’s not clear what will happen next, looking at the experience of some of the established players in the West, we conclude that there will be a few winners in this exercise, and those few will reach much higher valuations. high. However, there are bound to be many losers along the way. Investors looking to invest in a next-gen company should be comfortable holding stocks for the long term, have a fairly high level of conviction that they have a winner, and be able to afford significant losses if the going. do not work. If you feel that you do not have all of the above capabilities, please re-evaluate your investment strategies to determine if these investments are suitable for you.

(Pankaj Chopra is the founder of Five Rivers)


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