Indian start-ups may be a tad overvalued but that shouldn’t matter in a decade from now, said TVS Capital Chairman and Managing Director, Gopal Srinivasan in an exclusive chat with CNBC-TV18.
“Every time there has been a bubble and when you fall off the precipice, it looks terrible,” said Srinivasan, “But when you look at it in a ten-year time frame, it is managed; it recovers in two or three years.”
The TVS Capital boss believes that while corrections in the valuations of Indian start-ups could happen, it should not become cause for worry.
“Some people see things that we don’t see and pay higher valuations; some others make bad decisions and pay higher valuations, but each transaction should be seen on a self-standing basis rather than paint everything with the same brush,” Srinivasan added, “So, there will be corrections, but in ten years will it matter? We shouldn’t worry too much about the valuation bubble.”
‘Payments and fin-tech sector will see corrections’
The marquee investor singled out companies operating in sectors like fin-tech as possible candidates for correction, but emphasized that this was a function of the sector’s possible overvaluation than that of the company itself.
“Some of these companies are in spaces with exceptional founders and they get a differential set of valuations,” he said, “There are spaces like Payments and Digital Finance that get exceptional valuations. They will face correction because it’s a sector value correction.”
‘Indian investors have a YOLO mindset’
One of the key reasons driving valuations of Indian start-ups, though, Srinivasan believes, is the ‘YOLO’, ‘TINA’ and ‘FOMO’ mindset of the Indian investor.
For the uninitiated, ‘YOLO’ is an acronym for ‘You Only Live Once’, referring to risk-takers; ‘TINA’ stands for ‘There Is No Alternative’, often used to describe those that bet big on a USP; ‘FOMO’ stands for ‘Fear Of Missing Out’ and is used as a reference point to decision-making under peer-pressure.
“The young millennial investors who want to put money in every IPO are all ‘YOLO’, companies that are one-off in their own areas are ‘TINA’, and the whole world is ‘FOMO’ because they think money gets magically made,” Srinivasan said, “So, when ‘YOLO’, ‘TINA’ and ‘FOMO’ go for a party, what you see is a (valuation) frenzy.”
‘The stock market is unforgiving without biases'
Acknowledging that the stock market would end up making for the sternest test for start-ups, sky-high valuations and funding pre-listing notwithstanding, Srinivasan said that many companies that went public recently should prepare to see valuations taking a beating, on the back of one bad quarter.
“The stock market is like the ocean and is unforgiving without bias,” he said, “Companies like Freshworks have lost a third of their market value since listing, which only means that investors have to be patient with companies that list but do badly in a quarter.”
‘Future lies in value-creation’
The future could lie in value-creation as opposed to valuation, according to Srinivasan. And those start-ups that don’t create value must be prepared to fail.
“Among the unicorns of today, 20 to 30 percent will fail and it’s only logical that it happens,” said Srinivasan, “Investors have a portfolio of bets assuming failures; nobody expects them all to succeed.”
However, the future is bright, Srinivasan believes, simply because start-up venture capital and private equity investors are merely scratching the surface of the Indian start-up ecosystem.
“The Indian market is very small,” he said, “Only two percent of our GDP is in venture capital and with the total value of Series A, B and C funds total to less than 10 billion dollars, it’s just not enough. We need more.”