My Digital Dilemma
"One of the hardest decisions is choosing whether to walk away or try harder" -- anonymous
The digitizing of our economy may be the only certainty in today’s business, and CedarBridge has been relentlessly trying to invest in the digital economy. To date, we have only ventured in one investment, but investigated dozens.
Many of the opportunities presented to us have sound underlying business models. Many of those are backed by reputable teams and experienced entrepreneurs. Yet, the breaking point has consistently been valuation.
There are many ways to value a startup business, but we usually reverse engineer the returns, assuming variations of the management business plan. We do not believe in startup valuation benchmark, because it means you may be only following the crowds in their foolhardy (read Tulipmenia, the crash of the Dutch tulip market). In most cases for such investments, the returns for going into a startup investment with all the commercial, management, technical, liquidity, etc risks yield the same as investing in a mature, stable, dividend yielding investment – somewhere around 20-30% IRR. Moreover, management consistently underestimates the time to build a business, and very few businesses can genuinely reach maturity level before 5 years (8-10 is more likely). That delay alone will usually drag down returns by half. For example, a 2 year delay in delivery will easily knock ~10% off the investment IRR.
Since 2010, I have observed the trajectory of many of the investments we turned down. Some failed miserably, and that is a risk that you sign for when investing in a startup. Some survived and where exited at humble to no returns because the starting valuation was excessively high (e.g. souq.com). Very few investments rewarded their investors handsomely. To be clear, my observations are restricted to MENA.
Not every business ending with “.com” deserves a royal valuation. Royal valuations is reserved for businesses, digital or not, that have unrestricted, sustainable high growth business models.
I would like to hear your thoughts on the issue.
U change the risk-return perspective. This mindset that has dominated our thinking and descion making in the last century is no absolute truth and so there is no need to treat it as a sacred thing!
Director (Family Office) - Mashreq Private Bank
7 年Sir, e-Education still seems to be a nascent/neglected sector in the digital space in the GCC. The school fees continues to be high (and yet mediocre) in a weak economic environment and if there is any spend that people will still consider opening their wallets will be for 'imparting career development opportunities' to their kids. This is one 'price inelastic area' where quality e-Education providers can both create and extract value. In my humble opinion.
Director (Family Office) - Mashreq Private Bank
7 年Very well written Sir... esp. the observation that many a times, the risk-adjusted-returns in a Start-Up may end up being the same as in a mature dividend paying business (+ the risk of delays in achieving full potential). All in all, I can remember the fateful purchase of RJR-Nabisco by KKR in 1990s for $45bn...something that just ended up giving meagre returns to it's LPs and inspired a book-&-a movie.