So, what's the price you would pay to buy a Picasso painting or ten bitcoins or, er, a financial technology startup? It makes sense to conflate the three because it appears that deal value, like beauty, is in the eyes of the beholder – and this can be a volatile, controversial business.
Financial technology startup BharatPe is in the news this month for the right and wrong reasons, it seems. First up, we had news that after it raised $270 million at a valuation of $2.85 billion, it was looking at raising another $150 million at $4 billion. Then, we heard its co-founder, Ashneer Grover, a serial entrepreneur with a been-there-done-that past, had got into a spat with Kotak Mahindra Bank on some unfulfilled desire linked to the initial public offer (IPO) related to tech startup Nykaa (FSN e-Commerce). And then we hear that Grover has been asked by BharatPe's venture capitalist-led board to go on “voluntary” long leave (a term usually reserved for government officers being probed or sidelined).
Bad Boy Founders and Groupie Cohorts
Aah, yes. While all this goes on, Grover, who has been accused of nurturing a toxic work culture in his startup, is one of the shark judges in the Indian edition of the Shark Tank television series, which is like a boxing ring for entrepreneurs.
What does one make of this circus? While psychological quirks are part of the soap opera, it is time to zero in on that one word that seems to be influencing adverse and perverse social behaviour in India's get-rich-quick zeitgeist: ‘unicorn’. The word refers, of course, to startups being valued at $1 billion or more. In the fairy-tale world of financial Cinderellas, Prince Charming is a cheque-waving venture capitalist (VC) who tells glassy-eyed entrepreneurs: “Thou art worth a billion dollars, dudes."
In a parallel universe of the past, ‘The Secret of the Unicorn’ is the title of an engaging TinTin comic book by Herge. In the contemporary universe, the one-horned mythical monster becomes a metaphor touted cleverly by VCs and entrepreneurs to show they are arriving fast at the high-table of high finance.
Scratch the surface, and you will find one of the cleverest games in town – one that seems to trigger bad boy founders and groupie cohorts.
By signing a small cheque with a big valuation, the VCs in question are making large, smart teams of youngers pour blood, sweat, toil and tears to build a rocket to stock market success. Some go up and place glowing listed satellites for others to emulate. Others become flaming failures. There are yet others that hang in the yo-yo world of subjective valuations, much like cryptocurrencies and Picasso paintings.
Unicorns out, Trishankus in.
A 21st-Century Mahabharata
While we shift from European comics to Hindu heritage, the mythological reference to a halfway heaven reached by King Trishanku in ancient Hindu texts is well in order.
What lies strewn on the ground in the process of betting on and building unicorns is like one of the final scenes in a 21st-century Mahabharata. A Duryodhan-like Ashneer Grover, perhaps. Lots of rudeness, volatility, wrecked dreams. Or there is a Yudhishthira celebrating a pyrrhic victory.
Literature apart, let us look at Nykaa and Paytm in this dramatic Unicorn opera. Nykaa was listed at a premium of nearly 80% to its IPO price of Rs 1,125 per share, and thus, was valued at close to $13 billion on debut. It is still holding to that level. Applause.
In contrast, Paytm (One97 Communications), a mobile wallet darling that shot to national prominence after Prime Minister Narendra Modi's shock devaluation of high-value currency notes in 2016, debuted in the market at a 9% discount to its price of Rs 2,150 per share and has plunged since to Rs 1,000-levels – less than half the IPO price that commanded a valuation of $20 billion. (Disclosure: I bought a handful when the shares fell. If I made a mistake, I may still count legendary investor Warren Buffett as a fellow traveller).
“Market is King,” announced a headline on Paytm's fall.
The 'Dotcom' Bubble
But the deeper issue is how VCs tote up unicorn valuations in their own narrow interest. High valuations make startup employees work harder because a valuation is a paper number and it sustains only when revenues and/or profitability match the VC hype. But there is blood on the hands and dirt on the streets when the hype ebbs.
Do you remember the “dotcom” bubble of 2000 that burst after sky-high valuations?
A couple of years ago, a media startup ran an engaging story likening the valuation game to a “Russian doll Ponzi”. Having myself bought at St Petersburg those dolls in which the colourful larger ones hide smaller ones in their belly, I quite like the analogy.
To cut the long story short, higher valuations by a VC fund are like big dolls hiding a small doll with much hype. New investors get in at higher valuations into such startups till the IPO kingdom come even as old VCs minimise their risks after recovering their initial capital.
After that, it depends on their luck and/or chutzpah. You go the Nykaa way or the Paytm way, or fold up like smaller ones.
Old-fashioned revenues and profits are a far cry in this game, but VCs get away because they are incubating futuristic, high-tech companies. Or so they say. However, as we saw in the case of Flipkart and Paytm, it could be less about high-tech inventions and more about betting on the aspirations of young consumers in a 140-crore-population-strong emerging market. That makes even high-tech companies effectively not much different from soap makers like Hindustan Unilever or ITC.
So, why should they be valued so high? The answer is blowing in the wind.
Picasso's art and startup valuations have, thus, a lot in common. Whether it is a deal in the art or whether it is the art of the deal is where the jury is at.
Whether a startup is like an Asterix taking on the mighty Roman Empire or a TinTin looking for a mythical unicorn depends on the details, and that thing called ‘market mood’.
(The writer is a senior journalist. He tweets @madversity. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)