This is how You can Invest in Startups while Minimising Risk

Mar 29, 2022

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I was recently asked by a financial daily for a comment.

They wanted to know my views on why the stock of Zomato is not performing despite interesting announcements of 10 to 12 minute food delivery and aggressive plans in quick commerce after taking over Blinkit.

This was an amusing question...the way it was put to me.

But in times when news and announcements determine stock price movements in the short run, one can hardly blame the mainstream financial media for such assumptions.

Indeed, the management of Zomato has explicitly stated they want to continue making minority investments in other businesses. They have even ventured into the lending business.

Does the stock deserve better valuations because of such investments, some of which may create huge optionality in the business?

I don't think so.

But why not? After all, aren't there enough examples on how such investments can create huge payoffs. Infoedge is a case in point.

Before I share my answer, let's first understand what Optionality really is.

Optionality is generated from an investment which has the potential to give huge returns, but the quantum of it cannot be ascertained while making that investment.

One can arrive at a fair value only over a period of time. Not to mention that such investments come with their fair share of risk.

And if they do not play out as expected, could lead to poor capital allocation.

The exciting aspect of Optionality is that the loss is limited to the extent of investment, but the payoffs could be disproportionately large.

It's one thing to experiment with optionalities when the core business is strong, and one can afford to take calculated risks with potentially big pay offs. Zomato barely makes this cut.

It's yet to prove itself in the core business, especially as far as sustainability and visibility on profits is concerned.

Its investments in untested segments, for instance quick commerce, where the execution is even more challenging, just adds more uncertainty about the capital allocation and viability.

In fact, with the existing financials and cash burn in the core business, it falls in the realm of a speculative investment.

While I may not be comfortable with bets Zomato is making, there are businesses in listed space worth tracking on this front.

Let's call them incubators.

They are incubating some related and even some unrelated businesses. This could be via investments in startups or developing these verticals within the business.

While there is a possibility these investments may go bad, there is also a chance that one of these could win big like InfoEdge did.

So are there enough such examples?

I'm going to share some with you today. But do note this doesn't amount to any view on the stock.

Nonetheless, tracking such developments could help you unlock some great opportunities. Not to mention it could offer an indirect way to invest in some startups and interesting ventures in the listed space.

By the way I have recently recorded a video on such opportunities. I hope you enjoy watching it.

The first of these companies is Indiamart. There is a bunch of entities it has invested in, including in logistics tech, ecommerce businesses, and some tech platforms among others.

What makes Indiamart different from Zomato is that it has proved itself in the core business of B2B e commerce.

The company enjoys a 60% market share, has a debt free balance sheet, very healthy profit margins and return ratios, and positive operating cash flows.

Other examples in large cap space, where optionality offers comfort include Infosys, Hero MotoCorp, and HDFC Bank.

As per Crunch base, HDFC Bank has made 20 investments, most recent being in Stockal in September 2021. Stockal is a global investing platform helping investors from India & Middle East invest in US listed firms.

It has also invested in Smallcase, a fintech startup. Smallcase offers a platform that allows retail investors to invest in model portfolios of stocks, Exchange traded funds, and REITs.

Its other notable investments include KOOH Sports, Peel-Works, Furlenco, Virtuoso Infotech, Lal10, CarDekho, and Reliance Jio. A lot of these are platform based businesses.

In the past, its notable exits include Teamlease Services and Bandhan Bank.

HDFC Ltd too seems to be following the example.

Along with Ivycamp, it has launched 'Finnovation', to collaborate with startups on innovations in lending and finance industry. Key focus areas include Property Assessment for Mortgage Loans and Customer Servicing.

The next on this list of fundamentally strong companies exploring optionality is Infosys.

It has an innovation fund, invested in different entities that are leading enterprises in data and information extraction, drones, air quality, performance optimisation system for professional sports teams, and an India focused VC firm.

And then how can one forget about Hero MotoCorp. Its first investment in Ather Energy, Bangalore based EV startup happened in October 2016. Ather Energy is now planning to get listed in 2 years.

By the way, Optionality is not just limited to largecaps.

For instance, in the smallcap space, there are names like Minda Corporation and Kabra Extrusiontechnik that have ventured into EV space through such acquisitions and incubations.

Minda Corporation is an auto ancillary firm that has taken 26% stake in EVQ Point. an EV charging solution startup.

Kabra Extrusiontechnik, the largest manufacturer of plastic extrusion machinery in India has ventured into EV space as well with Battrix.

Battrix focuses on EV battery technology and green energy. It has already received orders from the electric 2-wheeler makers for battery packs. It has announced further raising of Rs 3 bn for the expansion of this future technologies brand.

Other companies in the mid and smallcap space that could benefit from optionality bets include BSE Ltd, Cosmo Films, and Dhanuka Agritech.

BSE Ltd, apart from being a stock exchange, has successfully incubated Star MF platform. It's like the UPI of mutual fund industry, with over 2 lakh agents distributing mutual funds on it. Star MF is already highly profitable.

Also, BSE has been actively navigating new waters. It has entered IPO distribution, the SME platform, bond distribution, commercial paper distribution, insurance distribution, with Ebix of the US, and power exchange.

Dhanuka Agritech is another firm in smallcap space making tech bets to supplement its core business of agrochemicals.

It has invested in IoTechworld Avigation, which makes drones by the name Agribot. The technology has good potential application in agriculture.

Then there is Cosmo Films. This flexible packaging player has launched a Pet Care division under brand name Zigly.

Petcare is an underpenetrated industry in India growing at over 25% CAGR. Cosmo Films started with a pilot project that has performed better than expectations.

Now, the company is planning to roll out its digital first Omni channel business model. This will include both a digital and an offline model. Cosmo plans to demerge this into a separate company later on.

So these were some examples in listed space on companies that could benefit from optionality.

While it's difficult to quantify, the potential payoffs from exploring optionalities could be huge.

But please be sure that you're not carried away by exciting announcements. Focus on businesses with a strong core and downside protection.

I'll write to you more about optionalities in future editions of the Profit Hunter.

Warm regards,


Richa Agarwal
Editor and

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