Is it time to invest in start ups?

Tue, 12 May Pre-Open

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'Better late than never'.... that seems to be the guiding mantra for foreign banks these days as they tighten belts to be a part of much into limelight India's start up boom.

The e commerce revolution has suddenly and surely made inroads into the Indian economy. The shift is too obvious.. not just in the shopping patterns but the way e commerce businesses are often a part of headlines for one jaw dropping deal or the other. While global investment banks have been slow in taking notice of this trend, clearly underestimating the opportunity, they finally have sensed the potential in this space and are now gearing themselves to pitch for advisory roles for deals in the sector.

The venture funding deals for tech start ups in India have taken everyone by surprise. As an article in Reuters suggests, the number of such deals in India in the first quarter is higher than in China, with total value of investments over US$ 1 bn for the third straight quarter.

And while they let the opportunity slip in the past for the low value of deals, the foreign banks are not being fussy about the deal size now for the fear of losing this opportunity to local Indian banks.

India is one of the most promising markets as far as growth of online sales is concerned. The consumers are delighted. They have developed a taste for shopping that is just a click away - that comes with convenience of choice and easy delivery along with discounts. The owners and funds with stakes in these businesses are not complaining either, too preoccupied with the topline to bother that there are hardly any profits to show. But what next?

Well, we won't be surprised to see a lot of these companies making a bee line to get publicly listed in the near future. And it is this opportunity that global investment banks are planning to cash in. No wonder they are competing to offer loans to such start ups, hoping to get some favour when the payback time (IPO) comes , which does not seem too far.

There certainly seems good in here for tech start ups and investment advisory banks. But what is in it for investors? Well, not much we believe.

There are reasons for investors to be more cautious than optimistic when these companies get listed. The most obvious, yet the most ignored is that hardly any of these companies are making profits. Second- the huge competition in this space. Despite this segment being relatively new, the rules of normal business hardly apply here.. be it the first mover advantage or the consumer loyalty. It's a price driven business, a lucrative opportunity for online buyers, not investors or owners in the long term. Last but not the least, these firms are likely to get listed when market sentiments will be strong and valuations - expensive. While it may offer good exit opportunity for existing big investors, it could be a potential trap as far as investors are concerned.

There will be a lot of coverage in the media regarding this new revolution, however, we believe investors not to get influenced and exercise caution over optimism, as far as investing in the IPOs of these firms is concerned.