It's all about the people | Value Research Investors should pay less attention to business models and more to management quality

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It's all about the people

Investors should pay less attention to business models and more to management quality


So now that the dust has settled on the three big 'digital' IPOs that were due, the verdict is clear: Zomato and Nykaa were relative failures while Paytm was an amazing success.

Surprised at what I'm saying? No, it's quite clear. What was the purpose of these IPOs? To get some money into the businesses as well as a lot of money into the pockets of the founders and the funders. Who accomplished that goal the best? Clearly, Paytm. Zomato and Nykaa managed to clean out (very) roughly half the money they could have, while the Paytm lot licked the plates and bowls clean, leaving nothing on the table.

As the startup cheerleaders are fond of saying, what an inspirational story! It brings tears to the eyes. I'm sure it has already brought tears to the eyes of startup founders and funders who were hard at work planning the next lot of inspirational IPOs.

For some weeks now, many (though not enough) analysts have been pointing out that the digital IPO emperors have no clothes. Not only have these companies never had a profitable year, many of them are in businesses where no one in the world has ever made any profits, leaving it open to questions whether these activities can be called businesses at all. Therefore all those who are spending time on social media and chat groups trying to find someone to blame, look in the mirror. Losing money on over-priced and over-hyped IPOs is a sort of a rite of passage that every generation of Indian equity investors go through, it's just that some smart ones learn from other people's experiences.

However, that's not the most important thing to understand from the story so far. The real takeaway is that ideas and business models matter far less, actual execution and business competence matters much more. The headlines and the media talk and the talking heads are far too obsessed with the validity of the business models that the various digital startups have. I too have spoken only about the line of business itself above.

Let's look at the issue from a different angle. Think of any great stocks that you may have invested in over the last few years or decades. Were any of them in a unique business where the very nature of the business model played a decisive role in their success? I would bet against that.

Think of great companies like HDFC Bank, Asian Paints, Infosys, TCS and so many others. Each one of them is in a business where there are a dozen or more other companies. There is nothing unique about their businesses. What sets them apart is management quality. It's not about the line of business but what the management of the company will make of it, how they will fine tune it and how they will execute it. The idea is worth nothing much, it's all about execution.

Almost all successful stock analysis is essentially a search for quality management. You may think that you are looking at financial numbers, but those are just clues to how well the company will be run in the future. That is what will decide the future stock price, which is all that an investor is concerned about, really.

Even if you would like to invest in digital startups with zero profitability, I suggest that instead of thinking of business models, you take a hard look at companies from this point of view. You may realise that there are companies that are run as if the management has the attention span of a three year old who plays with a shiny new toy for a few days, breaks it and then loses interest and goes on to a new one. All is well till the parents keep buying expensive new toys but what happens when the money runs out and the spoiled child has to make the old toys work again?

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