India is the land of opportunity. Entrepreneurs capitalize on opportunities and solve problems to create businesses. We need many more of these rare breed of individuals to take our country to the next level. Till the longest period of time, public markets were the only way to access equity capital for entrepreneurs. However, over the last two decades, private markets have become very large and there are lessons that we as public markets investors can learn from the same.
Private markets here refer to privately held
and VC funded companies. Public markets here refer to the listed companies. It
is fascinating to see the journey of some very large and successful private companies which have gone public, many more are in the pipeline to do so.
As an active public markets investor, I have
spent a long time scoffing at the workings of the private markets. But as I
have matured (hopefully) I wanted to assimilate what is best in that world and work
to bring it to this side. As it turns out, there is a lot that we can be done.
So here we go.
Some of the salient features of the private
markets -
Founders backed by VC are very hungry for
growth and scale and are built to delay gratification (profits) for later.
They work in teams (co-founders are common)
and enable the larger teams. The teams also have stock options to benefit from
the eventual pay day.
The founders rely on the VC not only for funds
but for strategic advise too. The VC have their playbook for the growth of the
companies and eventual exits.
The founders are not averse to diluting their
stake for the sake of raising capital to propel growth. Owning a smaller piece
of a larger pie is preferred.
Many of these companies are founded to tackle
large issues and work on “mission mode” most of the time.
Mostly “institutional” capital backs these
companies.
Private companies are staying private for
longer.
Private markets have a massive “network
effect” and the culture of “paying it forward”. The culture of the
ecosystem is to help out one another.
Now let us look at what public markets can
learn from the success of the private markets.
While many public companies are profitable and
majority owned by promoter families, growth mindset is sometimes lacking. Slow
and steady or fast and the furious can describe the two divergent approaches.
All the multi-bagger gems in the portfolios of ace investors grew multi folds
by growing both their top and bottom lines. Growth comes first. Valuations
follow. The aim should be to go for sustainable growth.
Serial entrepreneurship in the VC world is
common - as an investor or an operator. Too few in the business world go back
to backing of new promoters or starting new ventures on their own, having
successfully exited earlier ones. Their experiences are extremely valuable and
should be put to good use.
There is an opportunity to create a good “sounding
board” to get ideas validated and understand the nuances of running a listed
business. Successful public market investors should play a more active role in
advising and guiding entrepreneurs on scaling up their businesses and at the
time of making important decisions.
Both the worlds involve a leap of faith and a
bet on the promoter. Public markets have the advantage of a certain size and
scale. Private markets can bet on teams with ideas on a drawing board.
On the scale of risk, private market investors
seem to love uncertainty while the public market investors seem to love
predictability. This is interesting, as the largest investors in private
markets vehicles in the developed world are institutions and endowments who
should, in theory, be averse of the extra risk. The winners take care of the
losers in the portfolio, it is true of both the private and public markets.
Public markets have the additional benefit of
liquidity, profits and validation of your investment thesis by the other
investors. It is also an “open club” where any investor can own the piece of
the business unlike the “private club” structure of the private markets.
In the private markets it is not rare to see
many “marquee” investors on the same cap table, coming in at much higher
valuation rounds and significantly different rights as the companies scale.
This is rare in the public markets.
Some private market investors have now become
very good public market investors. We are also seeing many public market
investors actively seeking and investing in private markets. The “crossover” is
already happening.
Given the size of our country, we are still extremely
capital deficient, especially equity risk capital. There is an urgent need to back the
visionary promoters who have achieved scale and are raring to go to the next
level.
Our aim should be for the public markets to keep
getting better and deeper, which can only happen by enhancing the quality of
the companies and the investors. Because ultimately, the private markets are dependent
on the public markets for their exits.
