Have you heard of Warren Buffett? Yes, that is a stupid question. Now try this. Have you heard of Masayoshi Son?
The Japanese telecommunications and internet mogul invested around $31,000 in Alibaba. That amount is roughly worth $60 billion today. In those terms, Buffett’s success pales in comparison.
This was what a panelist on the discussion of alternative investments at the Morningstar Investment Conference pointed out. He then quickly referred to an Indian example. Back in 1999, the promoter of Just Dial had offered an investor 40% of his company’s stake for Rs 6.7 crore. It is worth around Rs 5,000 crore today.
A significant portion of the discussion centered around private equity and venture capital as an investment avenue. Within this space, the panelists noted that there exists immense opportunity for investors from an e-commerce perspective.
Today Business Standard reported that Jack Ma, the founder and executive chairman of Alibaba promised higher investments in India. He noted that Indian sellers were one of the largest suppliers on Alibaba’s e-commerce platform, second only to the Chinese. The newspaper also reported that retail giant Amazon is planning to buy out fashion portal Jabong.com.
E-commerce as a business proposition is here to stay. Most of them in India are not necessarily innovative ideas but ones that have been successfully executed across the globe. While some e-commerce companies will become big and reward investors, maybe 90-95% of the ones will actually have to die or consolidation will take place. Not too long ago Flipkart acquired Myntra.
To drive home this point, Nilesh Shah shared an interesting insight from Sir John Templeton during an interaction the legend had with various fund managers. Locomotives changed the way the world moved. But people did not make money in railroad companies or locomotive companies. Motorcar too changed the world. But how many made money in motorcar companies? When Henry Ford began making cars on a commercial basis, there were 238 such companies in the U.S. of which 235 went bankrupt.
Innovations will always happen and continue to happen. But will an investor make money out of them? That is why when looking to invest in the e-commerce space investors must give a great deal of weightage to the business model and the valuation. The trick is to invest in the companies that will eventually flourish.
Such investing is suitable only for high net-worth individuals, or HNIs, because it involves locking in money for long periods of time and taking a much higher risk. That too, only after sufficient allocation to the more conventional asset classes such as equity and debt.
A report recently released by IIT Madras indicated that from the 500 HNIs interviewed, around 80% displayed an inclination towards venture capital. Not surprising. A private equity investor, or a venture capitalist, over a seven to eight year period, could see an IRR in excess of 25%, a very viable alternative to public equity.
