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This article is more than 2 month old.

The Greater Fool Portfolio Theory - Ponzi Variant or Employment Guarantee Program?

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The founder and chief executive of Zomato has just announced that it will invest USD 1 billion in startups over the next two years. The announcement therefore gives rise to the logical question - is Zomato an ”Indian multinational restaurant aggregator and food delivery company” as claimed? Or is it, more likely, a hybrid SPAC (Special Purpose Acquisition Company) that has used astronomical valuations of an existing - though loss making - business platform to raise “blank cheque” public monies in IPO to fund yet-to-be determined acquisitions?

The Greater Fool Portfolio Theory - Ponzi Variant or Employment Guarantee Program?
The founder and chief executive of Zomato has just announced that it will invest USD 1 billion in startups over the next two years. This is in addition to the USD 275 million it has already spent across 4 companies in the last six months. This announcement has been made even as Zomato’s losses have widened for the September 2021 quarter to about USD 59 million, almost double that of the same previous year period, primarily on higher cost of customer acquisition.
The company had raised USD 1.26 billion in an Initial Public Offering (IPO) in July 2021, and is currently valued at about USD 15 billion.
By any rough yardstick, the entire IPO amount raised just a short 4 months back, and more, is now proposed to be invested in startups. Within the next two years.
The announcement therefore gives rise to the logical question - is Zomato an ”Indian multinational restaurant aggregator and food delivery company” as claimed? Or is it, more likely, a hybrid SPAC (Special Purpose Acquisition Company) that has used astronomical valuations of an existing - though loss making - business platform to raise “blank cheque” public monies in IPO to fund yet-to-be determined acquisitions?
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The answer to this question may lie in the frenzy that has seized the guardians of our monies, the “Masters of the Universe” private equity fund managers, hedge funds, investment bankers and the entire self-rewarding ecosystem that has built up around start ups.
It is nobody’s argument that the business landscape is not under massive disruption, and that there are huge opportunities to reinvent businesses across sectors on new technological platforms at a scale that will be dominantly monopolistic. Or that the building of this scale and dominance is required to be done in a span of time that shuts out potential competition.
The problem however lies in the ever spiralling valuations of newly listed startups.
The stock market, as many before have discovered to their peril, is a tiger that is easier to mount than to ride. Retail investors have historically, if anything, been even more obsessed with quarterly numbers and an ever increasing share price, than any “long term view” that private equity investors - with the luxury of light-at-the-end-of-the-tunnel listing for their exit - may take. IPO listing by a company on the market in fact, is usually the last step when there is a visible glide path to sustainable profitability, as the appetite of retail capital markets for consistent rounds of loss funding by any company have been low.
In such a scenario and with such pressures, at Zomato’s issue price or market capitalization, what are its chances to earn even a normative return for its investors, based on organic growth in its business within an as-per-market “reasonable” timeframe?
The template for earning short-term windfall profits through private equity investments is not a new one (Zomato’s seed investor has unrealised gains of nearly USD 2 billion on the same model). As long as the “startup idea - funded by PE- cashed out/marked to market price at IPO” pipeline at everspiraling valuations at each stage keeps gushing, the opportunity to cash out or value superlative gains - and sustain the investor company’s share price - remains.
As to the resultant underfunding of the main business of the business-turned-investor company for which the funds were primarily raised, or its future, that is anybody’s guess. And what the outcome after a few years may be, when business profitability demands sanity returns, perhaps the dotcom boom and bust cycle may have some pointers.
This SPAC-by-any-other-name model also raises other troubling questions, particularly of regulatory policy and oversight.
In the context of economic function and public policy, it is also perhaps pertinent to begin asking the question : what value add to the real economy do many of these billion dollar capital raising companies or valuations bring?
Most are still working on a subsidy model in a gig economy, in the name of customer acquisitions, with well recorded and increasingly adverse outcomes for their gig workers - particularly in the food delivery and urban transport sectors. Yes, it is providing large scale employment particularly in urban areas, but in a pattern that more closely resembles a corporate NREGA program funded by private equity and the capital markets than businesses with inherent profitability. There is still no evidence on sustainability of most of these now listed businesses when these market-funded subsidies are withdrawn, posing large risks on both employment and markets if they fail.
Most of the “network externalities capture” arguments for justifying these astronomical valuations being talked about are monopolistic features, after killing off potential competition and weakening bargaining strength of other stakeholders in the value chain. And there is too the crowding out of real economy companies from fund raising in the capital markets. It is for public policy to debate if it is better served in Ponzi valuations of passing-the-parcel and pyramid schemes, or in incentivising on-ground investments in say, infrastructure or new technologies of climate change or decarbonisation? The markets do what the markets do, but what of the regulatory and public policy understanding of the matter?
The likely tragedy is that the hype and liquidity of markets, accompanied by few investment opportunities and a deep fear of missing out, along with a poorly regulated self-serving ecosystem of intermediaries, has accentuated problems. Accompanied by an abdication of economic, regulatory and public policy in this laissez faire, free-for-all-melee, the hangover of this wild party may end up being more severe and long lasting, than the last one.
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