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INDEX
8. Valuing.
9. Start From the future.
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Introduction to Venture Capital.
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6. Higher than average risk levels that do not lend themselves to
systematic quantification through convention technique or tools.
7. Turnaround companies.
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Critical factors for success of venture capital industry:
The following factors are critical for the success of the VC industry in
India:
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Recommendations:
Regulator:
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investors amount to double taxation. Since like mutual funds VCF is
also a pool of capital of investors, it needs to be treated as a tax pass
through. Once registered with SEBI, it should be entitled to automatic
tax pass through at the pool level while maintaining taxation at the
investor level without any other requirement under Income Tax Act.
Presently, FIIs registered with SEBI can freely invest and disinvest
without taking FIPB/RBI approvals. This has brought positive
investments of more than US $10 billion. At present, foreign venture
capital investors can make direct investment in venture capital
undertakings or through a domestic venture capital fund by taking
FIPB / RBI approvals. This investment being long term and in the
nature of risk finance for start-up enterprises, needs to be encouraged.
Therefore, atleast on par with FIIs, FVCIs should be registered with
SEBI and having once registered, they should have the same facility of
hassle free investments and disinvestments without any requirement
for approval from FIPB / RBI. This is in line with the present policy of
automatic approvals followed by the Government. Further, generally
foreign investors invest through the Mauritius-route and do not pay tax
in India under a tax treaty. FVCIs therefore should be provided tax
exemption. This provision will put all FVCIs, whether investing through
the Mauritius route or not, on the same footing. This will help the
development of a vibrant India-based venture capital industry with the
advantage of best international practices, thus enabling a jump-
starting of the process of innovation.
The hassle free entry of such FVCIs on the pattern of FIIs is even more
necessary because of the following factors:
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Venture capital is a high-risk area. In out of 10 projects, 8 either fail or
yield negligible returns. It is therefore in the interest of the country
that FVCIs bear such a risk.
The present pool of funds available for venture capital is very limited
and is predominantly contributed by foreign funds to the extent of 80
percent. The pool of domestic venture capital needs to be augmented
by increasing the list of sophisticated institutional investors permitted
to invest in venture capital funds. This should include banks, mutual
funds and insurance companies upto prudential limits. Later, as
expertise grows and the venture capital industry matures, other
institutional investors, such as pension funds, should also be
permitted. The venture capital funding is high-risk investment and
should be restricted to sophisticated investors. However, investing in
venture capital funds can be a valuable return-enhancing tool for such
investors while the increase in risk at the portfolio level would be
minimal. Internationally, over 50% of venture capital comes from
pension funds, banks, mutual funds, insurance funds and charitable
institutions.
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Liability Partnership and limited liability corporations have provided the
necessary flexibility in risk-sharing, compensation arrangements
amongst investors and tax pass through. Therefore, these structures
are commonly used and widely accepted globally specially in USA.
Hence, it is necessary to provide for alternative eligible structures.
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include the companies funded by the registered VCFs also. The issuer
company may float IPO without having three years track record if the
project cost to the extent of 10% is funded by the registered VCF.
Venture capital holding however shall be subject to lock in period of
one year. Further, when shares are acquired by VCF in a preferential
allotment after listing or as part of firm allotment in an IPO, the same
shall be subject to lock in for a period of one year. Those companies,
which are funded, by Venture capitalists and their securities are listed
on the stock exchanges outside the country, these companies should
be permitted to list their shares on the Indian stock exchanges.
The venture capital fund while exercising its call or put option as per
the terms of agreement should be exempt from applicability of
takeover code and 1969 circular under section 16 of SC(R)A issued by
the Government of India.
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Global integration and opportunities:
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Infrastructure and R&D :
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Business Plans for Startups
Who reads business plans? Very few people read them thoroughly,
including most investors. And even if you submit a well-written plan to
the right parties, you'll be lucky to hold a potential investor's attention
for even 60 seconds unless you have one very strategic piece in place
-- a referral or personal introduction. Marc Friend of U.S. Venture
Partners says: "If someone I know refers a business plan to me, it gets
much more thorough attention. I reason that if the idea is as good and
unique as the entrepreneurs say it is, that they should have a network
in place that can verify the validity and uniqueness of that value
proposition by providing a personal introduction." John L. Walecka of
Brentwood Venture Capital agrees: "We entertain a lot of plans, but
the ones that are best qualified come through referrals."
Assuming you clear this hurdle and your business plan actually lands
on someone's desk, you'll want your plan to be succinct and
compelling. A concise and well-written business plan can do much
more than give you something to show potential investors. It can also
be an important tool for attracting strategic partners, identifying
strengths and weaknesses, and "evangelizing" potential supporters. If
the idea behind your business is solid, and you have a personal
introduction from someone with credibility, you will still need the right
"calling card" to get the millions you're looking for. Even after
establishing a business relationship that begins with a simple
handshake, you'll need something neatly typed on plain paper and
presented in an attractive binder, with numbers that make sense.
Most business plans are written because investors require them. But
they can also help you to clarify your thinking, measure your market,
analyze the competition, and think ahead. In short, the business plan
is your roadmap to success. Marc Friend approaches it like a
mathematician: For a business plan to be compelling, he says, "there
should be a logical progression to each of the steps. You want to get a
nod of approval at every step of the way so that by the end of the
plan, the investor says 'Let's invest!'" And although you may
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occasionally need to make minor adjustments to the plan en route, a
well thought out business plan will keep you focused on your ultimate
destination.
Many business plans are boring and nearly unreadable. Yours shouldn't
be. In business plans, as in so many other things, less is often more.
It can be an artfully expanded version of your elevator pitch. You can
create an exciting vision of your new company's future in less time
than it takes to read the sports page in your local newspaper.
For starters, you'll need more than a good idea. You'll need an idea
that's big, bold, and innovative if you want to capture the attention of
investors. As the Internet grows in quantum leaps, investors are
looking for ideas that alter the game. John Walecka explains: "We look
for incredibly bright, experienced engineers and entrepreneurs who
have a unique insight on how to change the way people do business
today in some important, fundamental way. We're always on the
lookout for that sea change that creates opportunity."
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And a bold, innovative idea is only as good as its execution. If the
team behind the project lacks credibility and experience in establishing
their ideas in the marketplace early on to declare success for the long
term, they won't get far with investors. Marc Friend comments: "I'll
take a brief look at the executive summary to see what they're
proposing, and then I'll flip to the resumes to see who's talking. What
special expertise does this team have that convinces me they can
accomplish the goal they set out to accomplish?"
Let's be brutally honest -- numbers seem solid, but they are the most
suspect piece of a business plan. You must include them, but they
don't mean much -- and investors will challenge them every time.
Although you can and should make the numbers look promising, be
prepared to defend your startup's strategy for generating revenue.
Most plans include projections based on overly optimistic speculation,
and venture capitalists take this information with several grains of salt.
In your plan, be honest but mildly optimistic -- it may add to your
credibility in the long run. And always support your numbers and
assumptions.
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Comparison with other source of investments.
The following are the activities of the VCF / VCC concerning the VCU:
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Venture capital Bought out deal Convential
loan
financing
VCC/VCF, payment
Uncertainty.
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Time period Very long. Exit from Not very long. Exit
May be set
. period
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Regulations only
Of such investment
Generating a Dealflow
Due Diligence
Investment Valuation
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Value addition and Monitoring; and
Exit
The venture capital process has variances / features that are context
specific to countries / regions. However, activities in a venture capital
fund follow a typical sequence with a number of commonalties.
Generating a Dealflow
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investor to receive a large number of investment proposals from which
he can select a few good investment candidates finally. Successful
venture capital investors in the U.S.A examine hundreds of business
plans in order to make three or four investment in a year.
DUE DILIGENCE
Due diligence is the industry jargon for all the activities that are
associated with evaluation an investment proposal. It includes carrying
out reference checks on the proposal. It includes carrying out
reference checks on the proposal related aspects such as management
team, products, technology and market. The important feature to note
is that venture capital due diligence focuses on the qualitative aspects
of the investment opportunity.
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sometime elaborate and rigorous and sometime specific and brief. The
nature of the screen criteria is also a function of the investment focus
of the firm at that point. Venture capital investors rely extensively on
the reference checks with leading lights in the specific area of concern
being addressed in the due diligence.
INVESTMENT VALUATION
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Symbolically the valuation exercise may be represented as follows:
NPV = ( cash / post ) x ( patx ( pat ) x k;
Where
NPV = Net present value of the cash flows relationg to the investment
comprising outflow by way of investment and inflows by way of
interest / dividends and realization on exit. The rate of return used for
discounting is the hurdle rate of return set by venture capital investor.
Cash represent the amount of cash being brought into the particular
round of financing by the venture capital investor.
Pre is the pre- money valuation of the firm estimated by the investor.
While technically it is measured by the intrinsic value of the firm at the
time of raising capital, it is more often a matter of negotiation driven
by the ownership of the company that the venture capital investor
desires and the ownership that the founders / management team is
prepared to give away for the required amount of capital.
( PAT ) is the forecast of profit after tax in a year and often agreed
upon by the founders and the investors.
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STRUCTURING THE DEAL
Minimization of taxes;
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Ease in achieving future liquidity on the investment.
Voting control;
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VALUE ADDITION AND MONOTORING
The value “that the venture capital brings to the portfolio company can
vary from one venture capital profession to another depending upon
the individuals background and approach to venture capital. There are
venture capital professional, especially those who invest in vary early
stage situations, whose involvement can go up to providing operating
management support. There are also other whose involvement may
not extent beyond leading and avid ear to the proceedings of quaterly
or monthly board meetings. The extent of involvement could also
depend upon the venture capital investors stake in the company and
his role in the consortium, when the investment has been syndicated
among number of investors. In a consortium, it is not an uncommon
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practice for one of the investors to play the role of the lead investor
taking upon himself significant responsibilities with respect to the
portofolio company, on behalf of himself as well as the co-investor in
syndicate. Investment exposure and / or specific ability to add value
and / or geographic presence are some of the usual criteria for a
venture capital investor being designated lead investor.
EXIT
2. Acquisition of a company.
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History and evolution of venture capital
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orange juice concentrate that had been developed to provide
nourishment for troops in the field.
The 1960s saw a tremendous bull IPO market that allowed venture
capital firms to demonstrate their ability to create companies and
produce huge investment returns. For example, when Digital
Equipment went public in 1968 it provided ARD with 101% annualized
Return on Investment (ROI). The US$70,000 Digital invested to start
the company in 1959 had a market value of US$37mn. As a result,
venture capital became a hot market, particularly for wealthy
individuals and families. However, it was still considered too risky for
institutional investors.
Well, things could only get better from there. Beginning in 1978, a
series of legislative and regulatory changes gradually improved the
climate for venture investing. First Congress slashed the capital gains
tax rate to 28% from 49.5%. Then the Labor Department issued a
clarification that eliminated the pension funds act as an obstacle to
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venture investing. At around the same time, there were a number of
high-profile IPOs by venture-backed companies. These included
Federal Express in 1978, and Apple Computer and Genetech Inc in
1981. This rekindled interest in venture capital on the part of wealthy
families and institutional investors. Indeed, in the 1980s, the venture
capital industry began its greatest period of growth. In 1980, venture
firms raised and invested less than US$600 million. That number
soared to nearly US$4bn by 1987. The decade also marked the
explosion in the buy-out business.
The late 1980s marked the transition of the primary source of venture
capital funds from wealthy individuals and families to endowment,
pension and other institutional funds. The surge in capital in the 1980s
had predictable results. Returns on venture capital investments
plunged. Many investors went into the funds anticipating returns of
30% or higher. That was probably an unrealistic expectation to begin
with. The consensus today is that private equity investments generally
should give the investor an internal rate of return something to the
order of 15% to 25%, depending upon the degree of risk the firm is
taking.
In 1998, the venture capital industry in the United States continued its
seventh straight year of growth. It raised US$25bn in committed
capital for investments by venture firms, who invested over US$16bn
into domestic growth companies in all sectors, but primarily focused on
information technology.
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which has since emerged as a significant player and a pioneer in the
industry.
Most of the success stories of the popular Indian entrepreneurs like the
Ambanis and Tatas had little to do with a professionally backed up
investment at an early stage. In fact, till very recently, for an
entrepreneur starting off on his own personal savings or loans raised
through personal contacts/financial institutions.
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However, it was realized that the concept of venture capital funding
needed to be institutionalized and regulated. This funding requires
different skills in assessing the proposal and monitoring the progress
of the fledging enterprise. In 1996, the Securities and Exchange Board
of India (SEBI) came out with guidelines for venture capital funds has
to adhere to, in order to carry out activities in India. This was the
beginning of the second phase in the growth of venture capital in
India. The move liberated the industry from a number of bureaucratic
hassles and paved the path for the entry of a number of foreign funds
into India. Increased competition brought with it greater access to
capital and professional business practices from the most mature
markets.
The Indian Venture Capital Association (IVCA), is the nodal center for
all venture activity in the country. The association was set up in 1992
and over the last few years, has built up an impressive database.
According to the IVCA, the pool of funds available for investment to its
20 members in 1997 was Rs25.6bn. Out of this, Rs10 bn had been
invested in 691 projects.
Classification
Genesis
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Private venture funds like Indus, etc.
To this list we can add Angels like Sivan Securities, Atul Choksey (ex
Asian Paints) and others. Merchant bankers and NBFCs who specialized
in "bought out" deals also fund companies. Most merchant bankers led
by Enam Securities now invest in IT companies.
Investment Philosophy
Size Of Investment
Value Addition
The venture funds can have a totally "hands on" approach towards
their investment like Draper or "hands off" like Chase. ICICI Ventures
falls in the limited exposure category. In general, venture funds who
fund seed or start ups have a closer interaction with the companies
and advice on strategy, etc while the private equity funds treat their
exposure like any other listed investment. This is partially justified, as
they tend to invest in more mature stories.
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A list of the members registered with the IVCA as of June 1999, has
been provided in the Annexure. However, in addition to the organized
sector, there are a number of players operating in India whose activity
is not monitored by the association. Add together the infusion of funds
by overseas funds, private individuals, ‘angel’ investors and a host of
financial intermediaries and the total pool of Indian Venture Capital
today, stands at Rs50bn, according to industry estimates!
The primary markets in the country have remained depressed for quite
some time now. In the last two years, there have been just 74 initial
public offerings (IPOs) at the stock exchanges, leading to an
investment of just Rs14.24bn. That’s less than 12% of the money
raised in the previous two years. That makes the conservative
estimate of Rs36bn invested in companies through the Venture
Capital/Private Equity route all the more significant.
Some of the companies that have received funding through this route
include:
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Torrent Networking, pioneer of Gigabit-scaled IP routers for inter/intra
nets
Car designer Dilip Chhabria, who plans to turn his studio, where he
remodels and overhauls cars into fancy designer pieces of automation,
into a company with a turnover of Rs1.5bn (up from Rs40mn today).
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Indian Scenario - A Statistical Snapshot
Contributors Of Funds
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Foreign Investors 570 2.23%
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Methods Of Financing
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Other Instruments 75.85 0.75
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Total 10,000.46 691
Financing By Industry
Medical 623.8 44
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Food, food processing 500.06 50
Biotechnology 376.46 30
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Financing By States
Gujarat 1102 49
Karnataka 1046 93
Haryana 300 22
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Delhi 294 21
Kerala 135 15
Goa 105 16
Rajasthan 87 11
Punjab 84 6
Orissa 35 5
Himachal Pradesh 28 3
Pondicherry 22 2
Bihar 16 3
Overseas 413 12
Source IVCA
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Problems With VCs In The Indian Context
One can ask why venture funding is so successful in USA and faced a
number of problems in India. The biggest problem was a mindset
change from "collateral funding" to high risk high return funding. Most
of the pioneers in the industry were people with credit background and
exposure to manufacturing industries. Exposure to fast growing
intellectual property business and services sector was almost zero. All
these combined to a slow start to the industry. The other issues that
led to such a situation include:
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Valuing
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most traditional parameters used to value companies simply cannot be
applied to these new age companies!
Most often, these companies operate in unknown markets and with
brand new technologies. There are no precedents to follow. There are
no established norms. There are only ideas and more ideas. Only a
very small percentage of the entrepreneurs diligently implement their
ideas and give birth to path breaking businesses. How do you value
companies that have had no past and only hold the promise of the
future?
It is in this context that valuation of software companies; Internet
companies and Dotcoms have come to pose formidable challenges to
both regulatory bodies and valuers. Regulators the world over have
tried to set some guidelines, which will help in the valuation of such
concerns.
But don't traditional valuation methods focus on these anyway? Don't
the existing statutory requirements necessitate the furnishing of such
information through annual reports and statement of results and other
declarations to various authorities?
The point is this: you cannot differentiate a Dotcom from any another
company. Ultimately, every business entity has to create and enhance
stakeholder value. Any business that does not do this does not deserve
to exist.
Hence, all normal disclosure norms and valuation methods should be
applied to Dotcom and Internet companies.
In fact, only the strict application of investment prudence and normal
business principles can safeguard the interests of all involved.
For example, the management team factor is said to be the most
important ingredient for the success of an Internet company or a
Dotcom. Or for that matter, for any business concern. Any business
venture will be on a sticky wicket if its management team is not up to
the mark. But, how will statutory norms ensure this?
Therefore, regulators need to ensure that all pertinent information that
is necessary for all companies disclose informed decision-making.
Policy framework, accounting policies to be followed and stringent
action plan against defaulters (that are implemented!) the other areas
regulatory bodies need to put in place.
As far as investors are concerned, one cardinal principle must never be
forgotten: caveat emptor!
After all, aren't valuation exercises a game of betting on the future?
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In early 2000, Internet entrepreneurs had succeeded in quickly
transforming their business ideas into billion dollar valuations that
seemed to defy common wisdom about profits, multiples, and the
short tem focus on capital markets. Below mentioned is an attempt to
understand how Dotcoms are valued.
The most common critique one hears about the valuation of Internet
companies is that their values balloon as their loss balloon. This
relationship is driven by 2 factors: supernormal growth; and
investments running through the income statement. Many Internet
related start-ups experience annual growth rates exceeding 100
percent. This hyper-growth when fuelled by investments that have
been expensed rather than capitalized will create ever-increasing
losses until growth rates slow.
Internet companies typically do not require heavy investments of the
type that get capitalized, such as factories, plant and equipment, etc.
their investment is in customer acquisition, which has to be expensed
through the income statement. For e.g., if the acquisition cost per
customer, through advertisements and direct mails of CD- ROMs is $40
per customer and a company successfully builds its customer base
from 1 million in 1 year to 3 million in the second year, to 6 million in
the third year, its acquisition costs will rise from $40 million in the first
year to 120 million in the third year.
In a ‘bricks and mortar’ retailer case, much of the customer acquisition
costs will comprise of costs consist of securing a store location,
furniture fixtures etc. these expenses are largely capitalized and
expensed over their useful life. Hence the physical retailer will break
even years earlier than the virtual retailer with the same investment.
Provided that the virtual retailer will earn a positive net present value
on its customer acquisition investments, increasing losses because of
accelerating customer acquisition will raise the value of the company.
These conditions of super normal growth and investment through the
income statement render short hand valuation approaches including
price to earnings and revenue multiplies, meaningless. The best way of
valuing Internet companies is the DCF (Discounted Cash Flow)
approach, which makes the distinction between expensed and
capitalized investments unimportant because
Accounting treatments don’t affect cash flows. The absence of
meaningful historical data and positive earnings also don’t matter,
because the DCF approach relies solely on forecasts of performances
and can easily capture the worth of value creating businesses that
have had several years of initial losses.
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A three-stage approach is used to make DCF more useful for valuing
Internet companies – starting from a fixed point in the future and
working back to the present using probability- weighted scenarios to
address high uncertainty in an explicit way, and exploiting classic
analytical techniques to understand the underlying economics of these
companies and to forecast their future performance.
The above approach is illustrated with a valuation of AMAZON.COM,
the archetypal Internet company, as of November 1999. From its
launch in 1995 it built a customer base of 10 million and expanded its
offerings from books to toys, CD’s, videos etc. it also invested in
branded Internet players like pet.com and Drugstore.com. This
company is a symbol of the new economy. It has a very high market
capitalization of 25 US$ as at November 1999 and yet the company
has never made profits and has lost $390 million in 1999. The
company has become a focus of debate whether Internet stocks were
greatly overvalued.
Instead from starting from the present – the usual practice in DCF
valuations is to start from the future – what the company and the
industry could look like when they evolve from today’s very high
growth, unstable condition to a sustainable moderate growth state in
the future and extrapolate it back to current performance. The future
growth rate should be defined by metrics such as penetration rate,
average revenue per customer, and sustainable growth margins.
For the purpose of understanding this concept, let us create an
optimistic scenario. Let Amazon.com be the next Wal-Mart. Say by
2010, Amazon.com continues to be; and has established itself as the
leading on line retailer; in both online and off line markets. Assume
the company has a 13% share of the total U.S books and music
market; it would have revenues of appx. $60 billion (based on today’s
market share) by 2010. Let us assume that Amazon.com earns an
average operating margin of 11% since due to its size will have a
better purchasing power and also incur fewer associated costs. Also in
the optimistic scenario Amazon.com will require less working capital
and fewer fixed assets than traditional retailers do. We also assume
that Amazon.com’s capital turnover will be 3.4.
Hence based on the above we get the following financials forecasts for
Amazon.com for the year 2010.
1. Revenues - $60 billion.
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2. Operating profit - $7 billion.
3. Total capital – $ 18 billion.
To estimate Amazon.com’s current value we discount the projected
free cash flows back to the present. Its present value is $37 billion.
Let us try and first understand what the Internet stands for, what the
Internet was intended for. The Internet is intended to increase
efficiencies and effectiveness that would aid in business transactions.
It is a tool to build efficiencies. How can one build a business model
around it? It is like building a business model around a fax machine or
a telephone. Some may argue that Direct Marketing is a business
model built around the telephone. But Direct Marketing is a channel, a
means for marketing and not the end and be all of the business
functions. Direct Marketing is used to enhance current business. But
what happened with the Internet? An entire business model was built
around the Internet. The Internet was intended to take over all the
functions in the supply chain and do away the human aspect of
business. We must understand the Internet is intended to AID human
beings, reduce human interference and hence the inefficiencies
associated with it, NOT do away completely with them. No
communication medium can become the root foundation of a business
model besides that for a service provider of that communication
medium. What was the main foundation of the Dotcoms? If you have
an idea that can be converted into a web application that caters to
most of the business functions the business will succeed. It was
assumed that the people would prefer to buy online rather than off
line. But what they forgot is that people don’t buy a product because
of good technology or that what the need is available just one click
away. People need other people. They need the human aspect.
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dreams; only handfuls survive in the end. Nature's law will thus take
care of the Dotcoms in the usual way. Most Indian Dotcoms have tried
to mimic the assumed early success in US and elsewhere instead of
asking series of fundamental questions:
What is it that I am offering that is not already being offered by
others?
What will be my revenue sources?
If there are many players in the field what will be the
differentiating factor?
Net business models, especially in the B2C area, will work best in
areas where there are no physical products to be moved. Meaning,
they should work well in areas like broking, banking and financial
trading-and not so well in grocery or garments. Reason: there is no
physical product that I need to cart from factory to consumer, from
Mumbai to Delhi. On the other hand, whether I am in Mumbai or Delhi,
in areas like share trading the net clearly facilitates transactions and
brings down costs. I can buy or sell a share more easily and at lower
cost on the net. I can also do most of my banking from home or the
office, or even through my cellphone.
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The once robust Dotcom sector has seen a stunning reversal of
fortunes in the past several months. And no one knows how many
more are quietly cutting expenses. Where has IndiaInfo gone now?
What is SatyamOnline doing? Whether a company shuts down
completely or simply cuts back, its advertising budget invariably
suffers. Marketing is the first thing to go. Dotcoms can't live by ads
alone.
In the next five years, out of all the companies existing in the Indian
Internet space (estimated to be around 500), 90 per cent will die and
the rest 10 per cent will survive through consolidation. The
consolidation will be done primarily through mergers and acquisitions
activity between companies that are technology driven and those
having strong business models. Only 12 per cent of all the Indian
Internet companies have received a venture capital funding and these
are primarily the ones that will experience consolidation activity. The
reason why incubation of start-up companies has not taken off in India
is that most of the incubator companies and venture capital funds
themselves are less than one-year old. Primarily financial compulsions,
rather than being driven by complimentary synergies between various
companies drive the merger and acquisition activity in India. This is
because the Indian start-up ecosystem is not yet mature, and the
venture capitalists are themselves learning.
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Over 80 percent of the 350 companies that have gone public under the
guise of the Internet are not showing profits. Because they don't have
profits, it’s hard to know how to value them. Amazon.com has been
valued like Microsoft on steroids. The reason that Microsoft has a high
valuation is that it has 37 percent to 40 percent operating profit
margins, whereas a company like Amazon, which is just a distribution
company, can never expect those kinds of margins. Microsoft is an
intellectual property company. An Amazon is just a distributor --
distribution companies typically generate 2 percent profit margins. But
since they weren't generating any profits, people didn't know what to
expect, so they thought -- oh, maybe they're going to be the next
Microsoft.
Now, people are starting to understand who are the real companies
and what are the real business models.
Clearly, the bubble has burst. Things will never be the same. What's
happened is a lot of people have lost a lot of money and is going to
scar them for a long time, and they're going to realize that it's now
back to fundamentals. It’s back to rationality.
The bottom line is that there was this game of musical chairs that was
being played. I think that intuitively people knew that the market was
artificially propped up, but everyone has been making so much money
in the market in the last two or three years, so no one wanted the
music to stop and it kind of took on a life of its own. E-tailing
companies plus the Web media companies got caught recently.
The e-tailing companies were caught with people realizing that they're
never going to make the kind of profits that a Microsoft or a
technology company would. As for the Web media companies: When
AOL merged with Time Warner, it was kind of like the smartest guy in
the Web media business, As Steve Case, said that in order to move
forward successfully I need old economy capability. So, a lot of these
pure-play Internet media companies, such as TheStreet.com and
iVillage, got kind of left hanging out there.
Bubble or boom, the dot still fascinates, and the rush to set up Dotcom
portals continues unabated. Evidently, the pot of gold at the end of a
venture capital rainbow is too strong a temptation to resist.
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