Abhijit Speaks :

I think I have spot the next bubble in the making…..

I was reading an interesting post on vijay’s blog. He’d thrown open a question, hence I thought of answering that question as a comment on his blog, on a subsequent re-consideration, I found it better to write a separate blog post that will be an answer and open a set of few more questions…

Here’s the original question -

How do you measure a startup?
Instead of trying to answer in a straight-forward manner, I’d take my usual convoulted way -

1. Basically most of the successful “organizations” (please note, I am not using the word ‘companies’) were at some point of time “two guys in a garrage” mode startups. Be it the Red Cross or the Rock Stars of today like Apple or Google.

2. Startup is a word coined circa dotcom bubble to speak about ventures, that were primarily backed by Venture Capitals (though not necessarily). I’d use the following defination of startup – “A commercial venture aimed at (hopefully) establishing and running a business, that tries to address needs of a customers in a manner that have not been addressed yet.”

When I resort to this rather simple looking definition – My metrics for the startup become very obvious. The metrics thus are -

a) How successful the startup is in “delivering value to its customers” (Though our ‘civilization?’ is reaching a stage where a large part of the value is “perceived” and a very very miniscule is “intrinsic”, but thats okay!!)

b) How successful the startup is in “creating a wealth for the stake-holders. Note again I have not used the word ‘founders’ here.”

A startup satisfying both the metrics in my opinion will be a suitable candidate for being called a successful startup. To ultimately qualify for being a successful “startup”, the answer is not “IPO”, though ordinarily that is a logical conclusion of the startup (“where the ‘distribution’ happens from the founders to the general public.) I think for a startup to be a successful, a final criteria to be fulfilled is – to have (or develop) a viable business and being able to last longer than the life of the original creator of the startup (aka the founder.)

Of course these are very subjective metrics so to speak and are not useful enough in ‘establishing the worth of the startup for it being qualified to be listed on an exchange like AIMS (I have workd in the past for a startup that was planning to list on AIMS) or specialized exchanges for ’small companies’. But to me the whole exercise is not for “raising money for business development” but something much different, which might not be the original intent of the exchanges, but I can see it coming.

So I’d adress what this “specialized exchange for small companies are going to bring with them.”

An exchange like AIMS if I understand correctly, stands somewhere between Private Equity and Public Listing. Which essentially means – the risk about the “startup” is distributed across many “investors” rather than to only one (or a set of investors) as is the case with Private Equity. In the case of Public – the Risk is distributed to common investors at large.

This looks “wonderful” that “small companies will be able to raise capital without having to undergo stringent requirements of listing on established exchanges”. There are some goodies to the founders – They can get equity investment – without having to relinquish too much of control (in the form of board seats) to one (or select few investors.) For the “investor community, it’s a great thing that the ‘risk is spread across many investors.’ Not nostalgic yet? O here it is – This is very similar to what CDO/CDSs were, This is more like Collateralized Equity Investments. CEI (I coined a new term?).

So long as this remains like that – no problems, but I can clearly see a few things coming in the next wave of financial “innovation”, structured products/amplified by leverages whose underlyings will be the companies listed on exchanges like AIMS . Then ETFs/ derivatives on that traded on ‘established exchanges’ and so on!! This is in my opinion “The next bubble in the making!”

Ok how are social networks related to this – That is the twist in the tale “How does one justify the optimistic (read as obscene) valuations some of the social networks/web-startups are getting, How do you value them at all when there’s no established revenue model.” The idea is very simple actually – most of these companies will get listed on ‘exchanges like AIMS’ afterall everyone wants a pie of the Social cake. and you’d soon see most of these ’social startups’ listed and traded between a select few investors on the exchanges like AIMS and their ‘derivatives – like ETFs traded on more established exchanges’. So everyone’s going to have a pie of the ’social cake’. Now I know why “social networks are so hot!!!”

Come on we need to ensure that there are enough jobs created for the ever going population of the world or the other choice is .. My friends know what I speak, but I’d rather avoid speaking about it publicly.