2. Buying Sales: Internet companies, transfer money to customers’ pocket by offering ‘attractive’ discounts. Result: They buy sales from their customers, not their loyalty.
3. Customer’s Loyalty: It is not to the Internet Company, but to the ‘attractive’ discount offered by them. Result: As long as Internet Companies continue to offer ‘attractive’ discounts they continue to get customer’s nod; and vice-versa!
4. Race To Death: This forces Internet companies to fiercely compete among themselves in offering ‘better & deeper’ discount. Result: They end up transferring more money into customers pocket & inadvertently join the race to death! What compels them to indulge in this dangerous game? The quest to maximise ‘Gross Merchandise Value’ (GMV)
5. GMV: Many, if not most, new age companies are not profitable & hence time-tested methods of valuing business do not apply to them. Therefore, Investors, in their wisdom, have created a set of new metrics, which they use to value new age companies. GMV occupies a pride of place among the metric identified by them. For the traditionalist, GMV can loosely be identified as Gross Revenue!
6. Valuation: Investors use ‘Multiple of Revenues’ to value a company – this means that to value an Internet business, investors multiply GMV with a ‘multiple’.
7. Maximise Valuation: How do both – Internet Company & investors maximize the value of the company? If the multiple (Multiplying factor) remains same, then to increase the valuation of a business the GMV needs to be soaring; when higher GMV is multiplied by the multiple, the valuation will be higher. But unfortunately, GMV is a vanity metric.
8. Vanity Metric: Disproportionate focus on GMV gives a false sense of well being to founders & investors! When this vanity metric is consistently pursued, questionable decisions get made! Eventually, the chicken comes home to roost – as it is happening now for many Internet companies!
9. Money raised ‘drained’ away: At higher valuation higher quantum of money gets raised; unfortunately, a sizeable share of it gets spent on ‘buying’ sales & creating expensive non-productive infrastructure like renting bigger office space, hiring people at gravity-defying salary!
10. Skin not in the game: Many promoters - for a variety of reasons, including raising capital - end up diluting their stakes in the company. By the time the day of reckoning comes, they have very little skin left in the game! Even if the company folds up their lifestyle will not be imperilled!
Result: Dark clouds of uncertainty hang perilously over the future of Internet companies!
Do you agree with my analysis? Do share your perspective & make this discussion richer!
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