Who will be the greatest fool?

1997 - 2000 was the first time around when young entrepreneurs were rewarded with glamorous valuations on the back of their dot.com ventures. Millionaires perhaps Billionaires were made in a short span of time from humble beginnings and then it all came down, like a house of cards. The Millions and Billions vanished into thin air. Names like Geocities, AOL, Boo, Excite, Lycos which were known the world over (even though they might not have had their services around the world) are now but a distant memory. 

As the world progressed, technology improved and financial products became extremely sophisticated. The business and economic cycles compressed. Not only have they become closer together but are also shorter lived. Move ahead, just 15 or so years, and here we are - Déjà vu? 

It is important to note that there is a very pertinent change between the dot.com era of the 90's and today. Today the firms have a potential customer base which is much larger in size who are able to access the Internet at a much faster speed at a much more affordable cost:

• Access - 2% of the world had internet access in 1998 and today that number is 39%; 11% of developed world had access in 1998 and today 77% do. Reasonably priced Smartphones have also brought the internet to the masses and made usage increase even when on the move. 
• Cost & Speed - From accessing a 512 Kbps dial up connection in India at INR 15,000 (USD 348 at the exchange rate then) for 500 hours in 1998 to approximately INR 4,000 (USD 60) for a 16 MBPS unlimited broadband connection today in India. 32 times faster for almost a 1/4th of the price.

More users are logged in and are transacting online than ever before. The potential market size actually exists today which was a mere projection in the 1990's.

On this background VC / PE funds have gone ahead and pegged valuations to businesses on metrics which most accountants had not even heard of (Gross Merchandise Value or "GMV"?). Profitability is a taboo word in the race to garner market share and be No. 1 in the vertical in which the dot.com operates. The hope being, like Alibaba in China, some dot.coms in India will eventually have pricing control and aim towards profitability once they are the undisputed market leaders in their respective categories and everyone else is extinguished. There is just one problem with that - we don't know who will survive and who won't. It is anyone's guess.  

Just like everyone else, I will hazard a guess here too, the firms which will make it are:

1. Survivors - Those which survived the earlier dot.com bubble and became the undisputed category leaders - Amazon, Ebay etc. - they have innovated and experienced hardship to be prepared for eventualities. 
2. Value Creators - Those that offer a genuine solution by using technology to create value - Uber, AirBnb, Zomato, FindYahan etc. These companies take existing infrastructure and resources and monetize them.
3. Real Businesses - Those which in the race of being No. 1 keep a keen eye on the bottom line and respect Gross Profit margins. They do not give them all up (and more) to attract customers. They believe in building customer loyalty through product differentiation, ease of use and technological advantage such as Hopscotch, Overcart etc.

In the hope of backing the right horse, the VC / PE firms have gone ahead and invested large sums of capital which they have raised from Pension funds, Endowment funds etc. The funds so invested in dot.com companies are being dis-aggregated to the consumers of their products by way of discounts.Whatever is left is being spent on marketing and overheads. Profitability is a distant dream. In this death race, what is inevitable is that several firms will fail. More value will be destroyed than created. Crafty accounting policies practiced by a few will not help the end holders of equity (the IPO subscribers) make returns on their investments. The first such company which goes for an IPO will open the Pandora's box of scrutiny on the true metrics and their validity on which extreme valuations have been based. In the hope of finding a greater fool, VC / PE firms are consistently raising valuation from one round to the next among each other all within a short span of time. Throwing good money after bad money. Where disciplined investors used to ask for Price Earning multiples, Book Value, Return on Investment etc. they have been swayed into believing GMV as the new age gospel truth. In the end there is one certainty - the losers (on aggregate) will be the retail investors (endowment funds, pension fund unit holders) and the subscribers to the IPO of some of these companies.

The only winner will be the one who finds the greater fool.