Valuations That Are – Valuations That Will Be : A VC To Stock Market Transformation Anil K. Gupta talks about various concerns over valuations in India.

By Anil K. Gupta

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Where is the Indian market at present and where it would be in the years to come is a matter of great discussion in India. We see incomparable growth happening in the country with world class entrepreneurs emerging out, but we also see the valuation of some of the big players of Indian startup ecosystem, like Flipkart and Snapdeal go down. So what's actually happening in the Indian valuation world, let's have a look.

Will the money continue to flow In Indian Market?

These are still the early days in India. Therefore, I think it will continue. Of course there is Indian money coming in, for example from Ratan Tata, but not only that. Chinese and Japanese capital are also a very much part of it. You look at Softbank, Alibaba and other such companies. Money from across the world is a part of Indian startup ecosystem. Yuri Milner has invested money and Napster from South Africa has invested, Singapore, Sovereign wealth fund has invested in India. And, of course, US capital, venture capital, and again from Europe.There is a good pipeline.

Venture capitalists understand patient capital. And the reason I'm not concerned, and in some scenes I see that as A+, is because it is nothing like what happens in portfolio investment where at the click of a button they can sell the stocks right away, be it is equity or debt. But if foreign investors put money in, say in a Flipkart or a Snapdeal, they cannot turn around and take that money back. They prefer more over less.

Why are we not seeing more IPO's from tech companies?

Some of the seasoned VCs are saying in Silicon Valley that the reason many of the unicorns, and it is even being said for companies like Uber too, are not going public is because if they do, their valuations will be lower.

Two statements come to mind – one is by Benjamin Graham who said that in the short term, "Stock market is a voting machine; in the long term, it's a weighing machine." Naming that in the short term it's the herd movement that determines what the stock price is. But that also happens in the private equity market like venture capital.

But in the long term, it actually comes down to the real value of the company. We see that now in the case of Amazon. If the company continues to be fundamentally strong, eventually its valuation will catch up with the fundamental strength. Not just the unicorns of India but the unicorns of Silicon Valley are still private.

For instance, look at Dropbox. Their valuation dropped. So, several Silicon Valley unicorns that went public, their valuation dropped. But eventually it will happen. For how long really can Uber remain private!

Valuations are real challenge in the Private –Public transformation of a funded entity

In April 2016, the chairman of the US Security Exchange Commission was in Silicon Valley to give a talk and shared that strictly speaking, the private equity markets are not controlled by the SEC. It's the public equity market that are controlled by them. But in the limited partners, if some of them are public entities, then in that case the valuation of such public entities, is it mark to market or mark to real value?

Essentially the chairman was making the point that there is a fundamental risk. If companies that are high in valuation remain private, because then if they are overvalued, the risk of a big downside valuation goes up. So we have to see how this game plays out.

And I think the same is happening in India or China or any other place. The venture capital phenomenon has pushed up the valuation all around the world. And therefore concerns about over valuation, that are emerging into Silicon Valley, are global concerns.

Anil K. Gupta

Michael D. Dingman Chair in Strategy and Entrepreneurship, University of Maryland

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