One area which I have always had great difficulty understanding is the valuation of start-ups. I have spent 3 decades working and I have not been able to set-up at enterprise worth a million dollars and young 20 year olds want valuation in excess of million dollars for enterprises that are just an idea.
Then there are ideas that have been implemented; but they are not generating any profits today. Even such ideas are valued at over Rs 10,000 crores by seasoned professional investors.
How are these valuations justified? For this one has to step back and understand certain “eras” in the history of mankind. Initial economic activity depended on manual labour. Almost everything was manufactured by hand for local consumption. The “transport” revolution” changed that. Then came the “industrial revolution” when machines started manufacturing items in large factories. The value therefore laid in the manufacturing activity. The current age in which we are living is the “information age”, where the maximum value is being created by use of technology in leveraging of information. That is why firms like Apple, Google, Facebook are becoming more valuable than businesses like car manufacturing and retail.
This information revolution is causing disruption in set patterns. Whenever such churning happens, there will be tectonic shifts- established players will lose value and new players will emerge to create value in the new emerging economies. In the past, when new cities were being developed the early pioneers who went and set up businesses there prospered from their ventures. Today there is a shift in the way people are buying. We used to go to a book shop to buy books. So if you wanted to be successful in this business, you had to be located at a prominent location and stock great variety of books to attract customers. Today this brick and mortar model is fading. You can browse on the net and by any book from Flipkart or Amazon at a discounted price. So these online stores and logistic firms that can fulfill these demands are prospering. In case of books, even logistics is not required as books can be downloaded in digital form. The world is changing and people who can spot these trends early and have the understanding to predict the future winners have a great opportunity to invest and make great returns.
However, to a spot a good opportunity you will have to reject thousands of bad offers. I am still in the stage of rejecting the bad offers in my journey to become an angel investor in a start-up. Maybe it is my conservative temperament or may be it is the wisdom gathered over the years or maybe I am too old to understand the changing paradigm. Good investors will have to invest time in understanding these changing paradigms; the returns will be worth their while.
What are your thoughts on this changing paradigm? Leave a comment below and share!
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