Unicorns, Crashes, And Cash Flows... Capital Lessons In Some Beach Banter

(Photo: Baris Karguwal/Unsplash)

I was gingerly amused to receive a WhatsApp forward from a bright millennial I had slugged a beer with on a Goa beach earlier this year. The forwarded document was a ‘redlight presentation' from perhaps the most visible venture capitalist on earth. This VC is also feted as the janini (ie, the mother, in the government's preferred lingo) of all ‘unicorns', that fashionable, catchall adjective that otherwise dull bureaucrats bandy around all the time to assert India's sexy economic story.

It's a ‘redlight presentation' because it reads like an elegy of remorse at creating these monstrous, profitless unicorns, now burning through scarce capital and hurtling towards demise. The elegy begins with honest remorse … and continues honestly:

Sorry, we massively misread what the pandemic would do to the world economy; how panicky governments would create humongous amounts of new money to pump prime asset values.
Sorry, when supply shocks created by Covid-19 shutdowns intersected with this tidal wave of new cash, not just asset but commodity and product prices also spiralled out of control.
Sorry, we just lost sight of how inflation corrodes value.
Sorry, we never thought Vladimir Putin would bite the Ukraine bullet, which became the knockout punch in an already gruelling Covid battle.
Sorry, we lost control of valuations because ‘capital was free'; we forgot how financial discipline can be excessively damaged by free capital.
Sorry, we called you ‘unicorns' and gave you unreal billion-dollar valuations even though your cash flow was a trickle!

(Photograph: lucas Favre on Unsplash)

Then the tone of the presentation changed, from regret and remorse to an ominous warning and advice:

Because capital is not free anymore; the United States Treasury yield, the least risky interest rate in the world, has moved from a few basis points to nearly 300 in a matter of weeks; house mortgages are up by a crushing 70% in six months, stalling the construction boom.
Because Nasdaq is down 28% in seven months, the third-largest drawdown in twenty years.
Because six out of ten software, internet, and fintech companies are trading below their pre-pandemic values, despite doubling revenues and profits … so their real value could have diminished by much more than half.
Because, alarmingly, a third of these ‘hot stocks' are even below their Covid lows, i.e. less than the price they had crumbled to in March 2020.
Because recovery, if possible, will take a long, long, very long time!

Finally, the redlight presentation ends with a bunch of homilies:

The strongest and the fittest don't survive, but those who respond to change do.
It's now going to be the survival of the quickest … the one who is the quickest to adapt.
The pain of discipline is less than the pain of regret.

They don't say it in so many words, but the regret/remorse/lesson is clear – it's the cash flow, stupid!

(Photograph: Scott Graham on Unsplash)

As I shut down the WhatsApp forward, my thoughts sailed back to that enchanting, breezy evening on the Goa beach. I was surrounded by a bunch of millennials, a couple of whom had read Network18: The Audacious Story of a Start-up that Became a Media Empire (Penguin Random House, 2016). So, they knew about my entrepreneurial hits and misses – perhaps more misses than hits, I reckon.

Anyway, they were a savagely curious and opinionated bunch of millennial investors, so our exchanges got animated.

Millennial 1: Why didn't you invest in Zomato and Paytm?

RB: Because both were crazily valued and nowhere near making money. But I will look at Zomato once the stock falls to Rs 50, and Paytm if it touches Rs 500.

Their loud sniggers came crashing into my earlobes. “Keep on waiting, old man … Zomato falling to Rs 50, he he, and Paytm to Rs 500, he he he. Are you nuts, old man?”.

Wryly, I picked up my phone and WhatsApp-ed my millennial friend. “You know the price Zomato hit last week? Nearly Rs 50, right. And Paytm? Nearly Rs 500, right … so now, are you nuts, young man?”.

Feeling vengefully satisfied, I shut the phone, and allowed my beach memory to take over again.

File photo of a Zomato delivery worker, in Mumbai, on July 13, 2021. (Photograph: REUTERS/Francis Mascarenhas)

Millennial 2: But you must have invested in Nykaa? That's making real money, right?

RB: Yes, I did. But I flipped it on listing day.

Their shocked, collective sighs hit me bodily: Sighhh. How could you sell on the first day?

RB: Why not? I paid about a thousand bucks, and in less than a week, I had made a post-interest/tax return of Rs 600 - in less than one week! That's an annualised return of 3,000-4,000% …I'd be nuts not to flip it.

Millennial 3: You are clearly out of it, sir. Now you will tell us that you've never invested in bitcoins?

RB: Yes, spot on. I've never invested in any bitcoin, or any other crypto, or any non-fungible token.

(Photograph: Pierre Borthiry on Unsplash)

All Millennials: Whaaat! Not even in bitcoins?

RB: No, how can I invest in something that does not have an underlying cash flow? I am just terribly wary of any so-called ‘asset' that is valued solely on perceived scarcity, without any cash flow attached to it. Which is why I've never invested in a painting … or tulip (I borrowed this venomous dart from the RBI Governor). But once NFTs evolve to represent the ownership of, say, this beach resort behind us, then I will invest in a crypto asset.

Millennial 4 (a tad confused): An NFT that represents the ownership of this beach resort?

RB: Yes, imagine if the hard assets, revenues and costs of this 1,000-room resort can be subsumed in a non-fungible token which can be bought or sold on a blockchain of real estate assets. Imagine that all the title and ownership rights are legally vested in that NFT. Now imagine if I could buy 1/1000th of this NFT, which is freely tradeable and transferable on the blockchain. That would amount to buying the value of one room in the resort, something I can't do in the physical world with its rigidities of stamp duties, indivisibility of land parcels, registration deeds etc. But in the digital world of NFTs, once their legal status is beyond doubt, once they are seamlessly traded on blockchains, I can buy and sell the value of one room as many times as I want on any given day. So, once NFTs evolve to this point, where the title/ownership of real assets with real cash flows are legally bundled into that token, that's the day NFTs will take off and become unstoppable.

There was a stumped silence on the Goa beach. Almost every millennial was scratching her or his head to figure out what I had just said. It's the cash flow, stupid!

Raghav Bahl is Co-Founder – The Quint Group including BQ Prime. He is the author of three books, viz ‘Superpower?: The Amazing Race Between China's Hare and India's Tortoise', ‘Super Economies: America, India, China & The Future Of The World', and ‘Super Century: What India Must Do to Rise by 2050'.