View: Paytm, BharatPe, and the Philosopher's Stone

The premature—even prepubescent—monetisation of these fledgling startups in listed public markets is a story in itself. Perhaps no other company represents this “valuation” phenomenon better than BharatPe. Started in 2018, it has commanded—in successive rounds of funding, a valuation of $425 million in 2020, increasing to $900 million by February 2021, and further to “unicorn” (billion dollar valuation) status of $2.85 billion by August 2021. In exit talks, its controversial co-founder is reported asking for his stake in the company to be bought out at a valuation of $4 billion. Notably, this valuation has been achieved during a period when India and its economy—like the rest of the world—went into shut down mode in March 2020 and from which it is emerging now. The mystery of this Philosopher’s Stone is the same in most other startups.

Those who try to understand this mystery, in the context of “old world” financial metrics like projected sales, EBITDA, and profit, are sneeringly dismissed. For others, like the Securities and Exchange Board of India (SEBI), who ask that the “new world” growth metrics like customer acquisition, growth rate, key performance indicators etc. be audited and valuation and logic disclosed by those seeking access to public markets, a self-dealing eco-system squeals in outrage and entitlement.

As a result, putative "unicorns"—born of easy private money—are sprouting like mushrooms after rain, and continue to seek astronomical valuations in public markets. But, as the mispricing and listing experience of the recent past shows, markets are beginning to turn cautious and look these startup gift horses in the mouth.

It is in this context, it would perhaps be worthwhile for startup founders seeking to build sustainable businesses, rather than encash the flavour-of-the-season, to revisit their understanding of valuations. And for government and regulatory authorities to create and support an enabling environment— including public capital markets—that nurture and fund these businesses over the long term, rather than just rejoice like the peacock—believing they are the cause of a seasonal investor rain.

Evidentially and empirically, the Philosopher’s Stone of corporate India, over nearly two centuries of its history, has been discovered by founders of companies who have chased larger purposes than just riches or fame that the capital markets and valuations could give them. The inspirational stories of Jamshedji and JRD Tata, G.D and Aditya Birla, Azim Premji, Narayan Murthy and most famously, Dhirubhai and Mukesh Ambani—all startups once—are narratives of institution building, with growing market valuations and wealth as a byproduct or means to an end, and not an end in itself. Even for a founder who was among the most active on the stock market, and widely credited with spreading the equity culture that saw share ownership in India grow exponentially, the legendary story of the stock market faceoff in Reliance Industries stock between Dhirubhai and the bear cartel led by Manu Manek (famously nicknamed “the Cobra”) in the early 1980’s, was the action of a promoter more in defence of market reputation of his firm that consistently delivered on ground results and its continued ability to raise monies, than any immediate or individual profit seeking objective.

It is a lesson that founders of new startups could do well to learn. Recent stories of ugly and entitled behaviour, allegations of petty fraud, unseemly boardroom brawls, overnight paper billionaires seeking to cash in while the going is good on the markets, regulatory bans, the incessant search of an ever increasing valuation as the Holy Grail, fill the pages of financial newspapers and provide grist for gossip mills.

It isn’t as if the stock markets haven’t been here before. It is a Kafkaesque tale that is enacted, forgotten, and repeated in each generation with regular monotony. Old hands would remember some of those seduced by the deceptively easy money to be raised from the public markets, only to fall by the wayside. MS Shoes, Orkay Industries, the list is long and cautionary.

Benjamin Graham and Warren Buffett have much timeless wisdom to offer on the subject of entrepreneurs and companies creating value versus valuation. But perhaps it is best summarised in the twist to the Harry Potter tale where, to protect the Stone from falling into wrong hands, Headmaster Dumbledore of Hogwarts places an enchantment on the mirror Erised (‘desire’ spelt backwards), hiding the Stone inside it and allowing the mirror to transfer the Stone only to one who wanted to find the Stone but not to use it for themselves. And perhaps the public capital markets are that mirror in which companies and founders find their true reflection.

If not Graham and Buffett, perhaps startup founders could make a start by giving Harry Potter a read?