The past year has been a roller coaster ride for internet-based new-age companies, from attracting massive interest during their IPOs (initial public offerings) to their stock prices falling sharply from their peak. — listed amid much fanfare. Major factors that could perhaps explain this decline are the global tech slowdown, blue-sky valuations, the Indian market being unfamiliar with such high growth ‘loss reporting’ businesses, and company specific and technical issues.
We focus on three key dimensions. First, was the stock move a bubble in new-age internet stocks? Second, we try to understand the mindset of new-age entrepreneurs. Third, we look at ways to identify winning stocks.
Is this a new age tech stock bubble: The level of fear that new age companies are seeing is overwhelming at the moment. Yet, being in a platform/network era allows successful companies to reap incredible rewards much faster than in earlier times. Despite the worldwide tech selloff, five of the top 10 most valuable global companies are technology companies. In India too, while some of these companies may go by the wayside, there are chances that some may emerge as big winners.
Asymmetric investment opportunities present themselves amid panic with few takers. So for long-term contrarian investors, this panic in new-age stocks could present an opportunity. book by peter thiel zero one Insist that “being contrary doesn’t mean dumb people disagree with you; It means smart people disagree with you. “Most smart investors would agree that investing in proven ideas is better than investing in unproven ones. However, business model innovation involves trying something new, and thus is unproven. This paradox is often true. For all the investment opportunities that are at the inflection point.
Understanding the Mindset of the New Age Entrepreneur: When a startup matures to the point where it has a killer product, large market and strong distribution channels, it can become a ‘scale-up’. Often, the fastest and most direct path from startup to scale-up is the hyper-growth produced by ‘blitzscaling’, popularized by Reid Hoffman in his book. blitzscaling, When someone sets out to grab a market, the risk is often not inefficiency – the real risk is playing too safe. Now, blitzscaling involves doing things that don’t make sense according to traditional business thinking, such as prioritizing speed over efficiency despite an uncertain environment.
Amazon has been criticized for consuming capital without delivering consistent profits. But the global e-retailer’s ‘inefficiency’ has helped it dominate online retail, e-books and cloud computing. The power of ‘blitzscaling’ lies in the ‘first scalar advantage’. Once a scale-up occupies a high position in its ecosystem, there is an inflow of both talent and capital. This explains why venture capitalists want entrepreneurs to pursue exponential growth, even if doing so costs more and increases the likelihood of failure. The bigger risk is moving too slowly and allowing competitors to win market leadership.
How to identify potential winners: Growth alone does not create value unless paired with an innovative business model. For example, a firm can achieve higher customer satisfaction and revenue growth if it sells 100 bills for 10. But no amount of scaling this model will create any sustainable value. Reid Hoffman offers a set of tools, principles, and patterns for evaluating innovative business models and winners.
How to know if a business model can deliver exponential growth: The first is the ability to predict the total addressable market and how it will grow. Next, the new-age firm must evaluate whether it can leverage existing networks to create viral distribution patterns – where users bring in more users. The third factor is the ability to generate large gross margins. Finally, the firm must be able to create network benefits.
Then there are some patterns to watch for. Models based on electronic bits are more scalable than those based on physical atoms, as is the case with digital goods. Then again, a platform with scale and network effect is a great combination. Three, there is great power in free services, Google and Facebook being great examples. Fourth, marketplaces have created many global winners, made more powerful when paired with a two-way network effect. Fifth, the subscription model has substantial distribution advantages. Finally, businesses based on feeds, such as Twitter or Instagram, can benefit greatly.
We believe long-term investors can leverage these tools, principles and patterns to identify potential winners of tomorrow.
Siddharth Bothra is the Fund Manager at Motilal Oswal AMC.
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