The valuation dichotomy and the boomerang effect

By Mohanjit Jolly

  • 26 Sep 2014

I recently came back from an absolutely exhausting, yet exhilarating 10-day, six-city, two-continent, three-country trip through India, the UK and China. For a people-watcher like me, the sfo – hkg – blr – del – bom – doh – lhr – pvg – vcr – sfo itinerary was a “drinking from the fire hose” socio-demographic delight. Let me explain. Traditionally, there have been two locations in the physical world where the entire strata of society can be seen side by side (at least in an Indian context) – a train station and a place of worship (the poor go for financial aspirational help and guidance, while the rich try to rid themselves of the sins that have enabled them to be, well, rich). Increasingly, however, with cost of travel declining due to proliferation of airlines in emerging economies, the airports could soon very well be the third such point of presence. I often talk about the fact that Indians are the most price sensitive, value conscious people on the planet. Interestingly enough, when I spoke a few weeks ago at the GSMA mobile Asia summit in Shanghai, even the Chinese claimed that Indians outdid them.Despite the price sensitivity, startups in India are starting to do well, really well.

There seems to be an incredible rejuvenation of sorts in the Indian startup scene of late, boosted by a relatively positive political climate, and the subsequent capital inflow. It’s not just hype this time around. Startups are making real progress (revenues, and at least a discussion around profitability) in India, thanks in large part to the mobile-first, mobile-only revolution.  Ecommerce and other consumer centric companies are darlings of both China and India, especially those that have a mobile strategy in place. More and more people are coming online through mobile devices in those parts of the world, given the obvious lack of landline infrastructure. Most ecommerce and online travel companies in India, as a result, are now seeing an increasing percentage of their business and in the not so distant future, will see majority of their business coming from mobile devices. What does this have to do with the title of article? Well, let me tell you…

Silicon Valley currently is absolutely scorching hot. Some are starting to compare the current startup and venture environment with the bubble of the late 90s. The sheer number of really interesting (and revenue generating, and in some cases profitable) companies is on the rise. The whole notion of a private company valued at a billion dollars or more was unheard of not so long ago. Today, there are several private companies garnering multi billion dollar valuations. Most of them have a mobile first or mobile-only component (Uber, of course, comes to mind but others like Airbnb, and Pinterest are also getting incredible traction primarily or exclusively on mobile). And much of the recent hockey stick growth for these companies has come from emerging markets, hungry for access to productivity, social and entertainment applications, on mobile devices. Even the incumbent large social networks like Linkedin, Twitter and Facebook are seeing significantgrowth in emerging markets. Stratospheric valuations being garnered by private companies in the US are, in large part, on the basis of subscriber or user growth, much of which is from the lowest ARPU consumers in the world. Hence, the valuation dichotomy.

While I don’t have the exact numbers, my gut says that the real value of each incremental consumer from emerging markets may be $.50-$1/year, yet the value being placed on overall consumer base for some high flying startups is probably closer to $50/year/user (at least an order of magnitude, if not two orders of magnitude greater). I would argue that this valuation mismatch is a trend that is decades old. Hotmail, which actually put DFJ (and Sabeer Bhatia) on the map, was one of the earliest tech examples of the valuation dichotomy. Microsoft paid the then hefty price of $400M on the basis of consumer adoption and growth, much of which was coming from India.

The other interesting coupling between US and India or the emerging economies has to do with the concept of reverse innovation, or what I call the “boomerang effect”. Often an entrepreneur pitching me will describe his/her business as the “Uber” or “Airbnb” of “pick a sector”. The funny thing is that the concept of the convenience economy, which has been ushered in by the smart phone in the West, is something people in the developing world have been familiar with for decades, albeit without the tech sizzle of today. During my years in India (2007-2012) for example, I was accustomed to everything from groceries and medical personnel (including those providing shots or drawing blood) to masseurs, teachers and dog trainers coming to the home. It’s good to see the developed world finally catching up.

Perhaps the financial services vertical provides the most poignant example of the developed world playing second fiddle to the emerging markets. I happened to be in a board meeting recently where one of the fellow board members got a transaction alert from his credit card company via an sms. He was delighted to see the real time alert and the detail associated with it, as a new concept in the US. I told him that such a system has been in place in India and other countries for years. And as a matter of fact was my de-facto remote GPS system for my family. Everytime my wife would use a credit card for a transaction in a particular store I would get a real time alert indicating the amount, the card used and specific location of the transaction. I knew through a series of alerts that the family was on a bit of a shopping spree on Commercial Street in Bangalore. All kidding aside, banking and transactional processes (wire transfers, p-p money transfers, for instance) are leaps and bounds ahead in other parts of the world compared with the US.

Bottom line: The ebb and flow between emerging and emerged markets, both in terms of products and services, as well as markets (and therefore valuation) will continue and should be understood more fully by companies and investors alike. But it is important to note the paradox of low value consumers resulting in some of the highest private company valuations (clearly buoyed by the long term prospects of those markets); and also how the developed countries in some ways seem to be playing catch up with the emerging world (albeit with heavy technology leverage).

(Mohanjit Jolly is the managing director, Draper Fisher Jurvetson India. The views expressed are strictly personal. They do not represent the views of the organization he represents.)

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