Should Equitymaster Recommend Startup Investments?

Apr 12, 2016

In this issue:
» The dried up QIP market...
» Foreign investors betting on a capex cycle recovery?
» ...and more!
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Devanshu Sampat, Research analyst

We are in a celebratory mood these days. Equitymaster turns 20 years young on 22 April 2016! What a journey it has been. From humble beginnings, we have come a long way. We are proud to be known as the aam investor's best friend.

But to tell you the truth, we do have a bias. We don't like to invest in startups. We have a good reason for this. The risk is just too great. If the startup fails, your capital could be wiped out.

Now we know that some you may not agree with us. We understand the logic in favour of small companies. After all, our small-cap recommendation service is doing great. Hidden Treasure has an internal rate of return (IRR) of 33%! This compared to the BSE small-cap index's IRR of 12%. So what's the problem?

It's this: You must buy into these small firms very early. Then hold on to them for a long, long time. The number of things that can go wrong during this time is enormous. But suppose you are willing to take this risk. Where do you find these gems? There are two places to look. The listed and the unlisted spaces.

There are really tiny companies listed on the stock market. They are high-risk stocks. Our small-cap service will never recommend those. The reason is liquidity. Hidden Treasure has strict liquidity criteria that prevents us from considering these stocks.

Then there are startups. Here too we face a problem. This space is dominated by VC investments. Valuations have already reached insane levels. In fact, this bubble may have burst. Many startups are either failing or will fail. It is difficult to predict which ones will succeed in the long term. Even VCs don't wait to find out! They want to exit after a few years.

But we have no doubt that the startup Megatrend is here to stay. The economy is not creating enough jobs. Young people will have to fend for themselves. Going into business is the only option for many of them.

We also believe many startups will fail. Most will never achieve the scale needed to be called a 'company'. They would be a source of self-employment at best. However, some will succeed. And they will create unbelievable amount of wealth. Is it worthwhile to go looking for them?

We are certain that Equitymaster's second 20 years will be vastly different from its first. If you believe the future belongs to startups, then let us know.

Do you think Equitymaster should consider recommending startups. Can they find a place in your portfolio? Let us know your comments or share your views in the Equitymaster Club.

03.05 Chart of the day

There are many ways to gauge investor sentiments. Valuations, the number & value of deals, and IPO activity are just some of the many ways to do so. Qualified Institutional Placement (QIP) activity is another way to gauge the same. And from this angle, market sentiments are fairly dull.

Does the QIP Trend Signal Dull Times Ahead?

A QIP is an equity raising mechanism for companies. QIPs tend to be a faster way to raise capital as the dealing happens with a few investors - only institutions in this case. And this is why companies prefer this route - because of its convenience and less resource requirements when compared to other methods of raising equity.

Despite it being the preferred route, action on this front has pretty much diminished in recent times. Especially when compared to the post elections phase when expectations were set sky high. However, with actual earnings being way off the mark from estimates, the markets have been volatile in recent times leading to very little action in the QIP space.

03.40

While activity on the QIP front has been dull...the sentiments of foreign investors seem to indicate quite the opposite. The Economic Times has reported that foreign investors have invested a big chunk of the money that came in last month in industrials. And thus, they are betting on a capex cycle upturn.

In the month of March 2016, FPIs invested a total of US$ 431 million in companies from the industrial space. When compared to the full year 2015 figure of US$ 710 million of investment in industrial stocks, this is definitely a big jump. The second preferred area is the finance space. It attracted FPI investments to the tune of US$ 401 million during the month (US$ 911 million in CY15).

All of these investments come in at a time when the asset turnover of India Inc. is hovering around its lowest figure in a decade. In the process, operating margins and return ratios of the corporate sector have been impacted too. However, with the high probability of the situation only getting better from here on, the quality of earnings is expected to improve as well. In the process, profitability will rise. And with that happening, there could be a massive jump in valuations which would take the benchmark indices higher. My colleague Rahul Shah believes the Sensex could jump as much as 70% over a two-to three year period because of this. Click on the link to know more...

04:15

The Indian markets were trading firm at the time of writing. The BSE-Sensex was trading higher by about 111 points or 0.44%. Buying activity was seen in stocks across the board with those from the auto and pharmaceuticals spaces being the key gainers. Midcap and smallcaps were in demand as well, with their respective indices trading higher by about 1% each.

04:30

22nd April is getting closer every day. We will be celebrating our 20th anniversary. It is a time of not only joyous celebration but also of reflection. On this occasion we'd love to hear from you. In case you wish to share your experience with Equitymaster or read what some of our valued long time subscribers have to say about us, please do so here.

Here's what Suresh Gujarati, an Equitymaster Subscriber since 2004, from Mumbai, had to say about his experience with Equitymaster:

  • Equitymaster will be celebrating its 20th Anniversary soon.I am happy to be one of the members of Equitymaster since last 15 years.

    To my memory, there were few programs earlier like, Stockselect, MidcapSelect and others to which I was a member. Today Equitymaster has become a big Institution. All credit goes to founder members Mr. Ajit Dayal and Mr. Rahul Goel. With their tireless dedication to build up this entry in Institution, by bringing new programs and new team. I mean that, It is not only guidance on stock market, but also introducing program on personal development like Common Sense Living by legend Mark Ford, followed by editor Anisa Virji & Ritika Bajaj. It is a delight read.

    What I can say about Vivek Kaul's Diary, one will become master in economics if reads and understand the articles.

    My present favorite, Mr. Apurva Sheth and Assad Dossani - simple suggestions!

    Please convey my best regards to the team of writers of 5Minute WrapUp, who give days summary if you miss to attend the scrip market.

    Best wishes and big success in years to come

4:50 Today's Investing Mantra

"Think about what the asset will produce. Look at the asset, not the beta. I don't really care about volatility. Stock price is not that important to me, it just gives you the opportunity to buy at a great price." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Devanshu Sampat (Research Analyst).

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2 Responses to "Should Equitymaster Recommend Startup Investments?"

Natalie Johannas

Nov 14, 2016

Please NO! Your IPO ratings / recommendations are a complete disaster. As a reader I lost huge opportunities by accepting your recommendations and not applying for the IPOs. I don't think you green horns even understand the stock market. You're better of teaching English Language in schools!!

Nats

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Ravi

Apr 13, 2016

While you may think the next 20 yrs will be vastly different from your first 20 years, we are not keen on you venturing into recommending start-ups.

If Warren Bufffet has not changed his phliosophy over 40 yrs, why should you?

We like Equity master for the unbiased, objective and sensible approach of picking good companies with solid fundamentals.

You do not have to change because something else is changing - Pls stick to your CORE. If the CORE is based on sound principles, they will withstand the test of time and need not be changed.

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