Fairval

Notes on Indian equities, sectors and economy

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Is it a real business, or is it a Po*#x*

Posted by fairval on October 13, 2016

As part of our transaction advisory work, we do considerable work in pharma / healthcare space. We also have our own angel platform which invests solely in pharma / heatlhcare startups. In this, we have several HNIs who are business owners from the same space – pharma / healthcare.

In other words, we regularly meet and talk to people operating in this space. Often these meetings come about when we are representing a client from healthcare industry, and on its behalf are talking to either a fund or HNI for funding.

In the last one month, in 3 separate meetings, we got asked roughly the same thing (about our clients) – is it a real business, or is it a P*#$@+?  No reflection on the clients, but is there something not quite right with this company they want to compare it with? From being the toast of the startup world, why are several people seemingly bad mouthing it?

We have no idea of whats going on with this company, but lets see if this becomes one of these standard questions one must ask a startup – are you a real business, or a P*#$@+?

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Article in The HinduBusinessline – Unit Economics explained

Posted by fairval on September 23, 2016

Lately, have been writing a monthly piece for The Hindu Business Like. The latest article was on key metrics an investor should check when evaluating an ecommerce startup.

6 questions for e-com start-ups

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How to value angel investments

Posted by fairval on July 13, 2016

My column in Hindu Businessline this Monday focussed on the issue of – how to value an angel deal.

In short – there is no method really to value angel deals. Most investors use absolute numbers within a certain range to invest, without necessarily linking them to business numbers.

For example, Silicon valley entity Y Combinator, which is more of a accelerator than an angel, has a specific, one size fits all formula. It invests $120K for 7% stake, which means it values the startup at $1.71m post money. This is roughly about Rs 10 crore pre money.

Some Indian startup funds seem to follow this also. India Quotient invested Rs 2 crore in one company I know at Rs 10 crore pre-money. Don’t know whether it is their standard formula.

Most HNIs though tend to be stingy. They like to stay in single digits in pre money valuations.

Instead of a flat valuation, it is possible to do a bit of structuring, like discount to Series A. Or take a metric like orders processed, and link valuation levels to few pre-defined ranges of orders processed. These kind of investments will need a cap/floor ideally. Some investors don’t like to keep such metrics for valuations, since it can skew management focus.

 

 

 

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Deals slowdown strikes again in May’16

Posted by fairval on June 8, 2016

2016 so for continues to see less VC/PE activity compared to 2016. Reported investments fell again in May. YTD amount is down 22%

 

PEdeals

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What’s a basic angel portfolio?

Posted by fairval on May 30, 2016

While writing on this blog has been suffering due to various issues, have just started a small series on Angel Investing in Hindu Businessline.

The first one deals with – what should be a min folio an angel investor must aim for.

Angel investors must aim for at least 8-10 deals

 

Angel investing has taken off in India in a big way in recent months. In early 2014, on an average, around 10 angel deals would be reported a month. From the second half of 2014, the angel space has seen a rising trend. The monthly deal count crossed 30 in August 2015, and has remained in the 30-40 range since then; an increase of about three times in a year.

The spurt in news flows on start-up investing seems to have caught the attention of the average high networth individual (HNI). For every HNI who is already an angel investor, there may be five new investors actively considering this asset class…..(click link above for full article)

 

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‘Delivery food tech’ is not happening, but other food tech may work

Posted by fairval on February 25, 2016

The Economic Times carries an article today carrying an article referring to Mahesh Murthy’s (a seed investor) where he talks about how food tech companies will never make money.

First, one needs to clarify this word ‘Food Tech’ – which has become a much abused one. This word is getting applied indiscriminately to a lot of businesses. We can see a few distinct slivers within this segment:

  1. Delivery logistics businesses – these are companies like Food Panda, Tiny Owl, Swiggy etc. This is largely a logistics business, though they also generate demand. The consumer says ‘I want to order food, lets go to foodpanda site, order etc..’. These sites list restaurants from where they will deliver food, within a certain radius. They have offered freebies to consumers to attract demand. Zomato is slightly different, since it started largely as a advertising platform, not really food delivery business, though. When Zomato entered food delivery in Mar’15, it may have been an afterthought, though it has structured the business differently. It does not deliver on its own. It seems to simply take order for a local restaurant (choices based on the customer’s address) and the local restaurant delivers. Will it be big for Zomato? Don’t think so. Zomato is largely about fine dining listings, not your average neighbourhood place. People are not going to order home delivery from fine dining.

 

  1. Delivery only restaurant businesses – these are companies like iTiffin, of iChef, Holachef, which make their own food, but don’t offer dine in. These are actually somewhat like Domino’s, except ordering process is via an app, not over a phone which one normally uses for Domino’s. The difference from Dominos is that these guys typically have 1 or more central kitchens, which a customer does not see. Dominos on the other hand has retail outlets, where it does not quite encourage you to eat, but they serve as local spokes from where delivery occurs. Box8 appears to be doing this to some extent. Saw 1-2 Box8 outlets in Mumbai, which don’t appear to be dine ins, more like local delivery spokes.

 

  1. Food aggregators – there is a slight difference from 1. These don’t aggregate branded restaurants, they aggregate home kitchens, or caterers at best. There seem to be several such startups in each large city, like Mumsmenu.com in Chennai, Cyberchef in Gurgaon,

Much of the discussion has been around category 1, which has also attracted the most money. We agree with Mahesh on that. It is hard to see how a Food Panda or Tiny Owl are going to create business value.

Check their economics. We believe their gross margin is about 10%. From this, they have to manage all their costs – cost of delivery and money collection, demand generation, CRM, and HO costs. When will it work? When the order size is large. Ideally Rs 2000 per order on an average. Is it happening? We don’t know, but we doubt it. Orders more than Rs 2000 or more will be rare. If per person cost is Rs 500 or more, that borders fine dining quality food. For that, people will go out. If it is everyday food – singly guys order dinner for instance, or a family that some day does not want to cook, and is not going out either – those don’t result is expensive orders. Per spend in such cases will be less than Rs 200. Think about it – if you spending more than Rs 500 per head, you would rather step out, enjoy service and let someone else clean the dishes afterwards.

From a Zomato conference call transcript: Our average ticket price is about Rs.600 per order and what I have heard, I mean what I have heard for our competitors is that it is about Rs.225 for them.

Don’t think there would be such a wide disparity, but our point holds – you are not going to get large orders in home delivery. Ergo, there is no business if you try to deliver. Maybe it can work the way Zomato is doing it – just order taking.

Categories 2 and 3, however, make a lot of sense. As we said, category 2 is like Dominos, but does require lot of spends in demand generation. Hence, it needs strongly differentiated product. For ex, we doubt ‘biryani at home’ kind of businesses (a recent deal) are really strong enough to create that differentiation. iTiffin and iChef are both highly differentiated. iChef has also done a transaction with Brand Capital, realising the need for creating demand and building a brand.

Category 3 also has promise, since the available gross margins will be more than what you get in Category 1. So the worst segment has got money, and has tarnished the word ‘food tech’.

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Jan’16 sees USD800m of VC/PE deals

Posted by fairval on February 13, 2016

Better than Dec’15, which say USD667m, but last 2 months (Dec and Jan) are slower than general trend in 2015.

Number of disclosed deals remains robust, at 85.

VCdeals_Jan16

 

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VC/PE investments for 2015 close at ~USD 14B

Posted by fairval on January 12, 2016

VC_PE

Eight years after 2007, when India Inc absorbed ~USD18B of VC/PE investment, the sector once again saw robust activity in the year gone by. Total VC/PE investment hit almost USD14B, the second best year in the history of VC/PE investments in India.

In contrast, in 2014, total reported investment was ~USD9B, from 381 deals. Total reported deals were 556, around 178 did not report amount of investment. In 2015, total deals reported were 881, of which 300 did not disclose amount invested.

These numbers may not necessarily match with figures from some other sources, we have noticed some other numbers which are larger than India Business Reports’ number. The reason could be people are counting within VC/PE  numbers, deals which aren’t exactly what we would call a VC or a PE deal. For example, we don’t see how a strategic investment qualifies as venture capital. Or an investment in a company outside India, even though the source of money could be from India.

 

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The streets are filled with idiots, and Volkswagen cars

Posted by fairval on December 20, 2015

Janhavi Gadkar got her license back, reported media. So potentially one more id***on the road. I have found the whole JG episode beyond comprehension. Here is a lawyer (should bloody well know the law better than others), who is 35 years old (not a juvenile), and a woman (sounds sexist, but aren’t women supposed to be more law abiding?).

So this senior corporate lawyer from Reliance gets drunk with the CFO of Reliance on a Friday night and mows down a taxi at reportedly 120 kmph and kills 2 people. The car she is driving is an Audi, so nothing happens to JG. Great endorsement for safety features on an Audi, but 2 persons died.

Volkswagen seems to be wanting to put its emission controversy behind it, given the recent spate of ads. Earlier, VW was found to have put in a system of rigging emission data on some its cars. Why? Because the goal of making fast cars isn’t quite in sync with having low emissions.

The common thread between JG and VW: Speed and fast cars. Car makers all over the world, and Germany in particular, are highly focussed on speed. German cars are the epitome of luxury car industry. And what do they stand for – speed and safety. The later though is a necessary evil – if you are making a fast monster, you have to put in features to ensure that the idiot driving it doesn’t kill herself or himself (the other party be damned).

The 2 problems with the car industry – cars kill people and cars cause pollution – are a direct result of the focus on speed. This is where regulators need to step in. Several things can be done: Put in regulation to cap the top speed of cars at 80-100kmph; or put a cap on engine sizes. Noise pollution is another big evil – that should be tackled by putting in metered horns – so say 1 min of honking costs say Rs 100. To honk, you need to ‘charge’ the horn. That should cut down noise, or atleast generate revenue for the government.

Car makers will still want to sell luxury cars – but that can be via other means. Let them innovate on other features like design, entertainment, connectivity or just bling. And they can give schemes like ‘lifetime honking free’.

PS: One issue I have missed reading in the media – is JG still employed in Reliance? The CFO certainly is.

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The LP displeasure at AVIGO – what may have caused it?

Posted by fairval on October 25, 2015

Last week several business papers like The Economic Times and Mint reported a rare kind of event – Limited Partners of a PE fund trying to chuck out the fund managers. Such events are certainly ‘extreme’ events.

An article in Mint says that LP displeasure was driven by poor performance. It seems Avigo management team or General Partners returned only 30% of the $125 million in capital raised as part of the Avigo SME II fund in 2005.

Separately, The Economic Times reported that LPs had sued Avigo for negligence and mismanagement of funds. Achal Ghai, the managing partner of the fund has been asked to leave and global investor Siguler Guff headed by Praneet Singh in India is now managing the show

According to ET, the tensions started in the second fund where almost 75 per cent of the fund was invested in Tecpro Group. The fund had invested in Tecpro Systems which got listed post investment, as well as some unlisted group companies. From ET article — “The fund managers did not sell the stake even when the stock rose five fold. Today the value is down by 60 per cent,” said a fourth person involved in the issue. The Tecpro stock had reached a high of Rs 454 per share in 2010, but is currently languishing at Rs 7.19 per share.

The articles in both Mint and ET don’t quite make it clear exactly what was the LP’s core issue. For ex, was it:

  1. So much exposure to one Group? Normally, any investment vehicle sets upper limit to the amount of investment it may make behind a single entity or management. 75% to one group, if true, is probably unheard of. However, the GP’s must have taken clearance from LPs before investing, so the extra ordinary allocation to Tecpro could not have been the main cause of distress.
  2. Or was it failure to sell in the listed company when the price was high? Is this what is meant by ‘mismanagement’ as quoted by ET.
  3. Or is there more to it? What, for instance, was ‘negligence’? Failure to sell does not sound like negligence.

I was checking out Tecpro financial’s sometime in FY12. Around that time, its revenue was around Rs 2500 crore. The company was growing strongly, at around 30% CAGR.

There was one item in its balance sheet which was rather unusual. At that time, its receivables figure was quite high, almost equal to 12 month of sales. If I remember correctly, one reason why this was bloated was that the company was carrying around Rs 800crore plus of ‘retention money’ within receivables.

This needs a bit of explanation. Tecpro was in the EPC business. In this, the customer pays in stages, partly at start, and then at milestones. When you commission the project, the total customer payment will typically be around 90%. Customers tend to retain around 10% for a year – to see of the project is delivering as per specs. This suggests retention money in sundry debtors should be around 1 year of retention ideally.

Rs 800 crore kind of retention money should equate to a revenue delivered of around Rs 8000 crore. But that was equal to almost 5 years of revenue. Or to put it differently, the company’s retention money ideally should have been around Rs 250-300 crore.

So the amount on the books appeared way too high. Why was that so? Now Avigo representatives were on the board. I suppose they would be aware of this issue as well. What was their stance about this? Wonder if this was also among the issues LPs had with the GP team? Was this one of the issues around the ‘negligence’ concern reported in ET.

PS: The papers have subsequently reported an out of court settlement between GPs and LPs

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