The Hindu Business Line : ‘The basic valuation principles always hold’

The ‘in flavour’ performance parameters that drive these valuation metrics — growth, RoE, ‘eyeballs’, among others — have kept changing to suit situations and specific industries. It is often the inability to distinguish between the performance and valuation parameters, as also a coherent correlation between them, which result in a distorted representation of standard ‘tools’ for valuation. — THYAGESH BABA, DIRECTOR, SPARK CAPITAL

Mr Thyagesh Baba

Recently, we had occasion to listen to Thyagesh Baba, the infectiously brisk director of Spark Capital, when he spoke rapidly about a variety of topics — ranging from the innards of his industry to the attributes of the right entrepreneur, from the tales of financial tsunami to his dream of owning a private jet — during lunch at Business Line.

For instance, we asked Baba, as we called him, “What are the tools for business valuation that are hot these days, and what are the tools that have fallen by the way side?”

Basic valuation principles always hold — multiples of cash, earnings, book/asset value, he said. “The ‘in flavour’ performance parameters that drive these valuation metrics — growth, RoE, ‘eyeballs’, among others — have kept changing to suit situations and specific industries,” he added.

It is often the inability to distinguish between the performance and valuation parameters, as also a coherent correlation between them, which result in a distorted representation of standard ‘tools’ for valuation, chided Baba, giving a peek into the evolving mindset of the valuer.

“Simply put, an investor seeks to make returns that are commensurate with his perception of the risk he is taking. Geography, asset class, markets, comparatives are some of the factors at play when such valuation decisions are made.”

An MBA from IIM-B, Baba was an equity research analyst at Peregrine at a crucial time, before he moved on to the corporate finance arm of Citibank at India.

At Spark Capital, his strengths are in equity valuation and capital markets, apart from the thrust he provides to the firm’s deal-sourcing activities. Excerpts from the interview:

On the entrepreneurial choice.

To the extent one gives up a job to become an entrepreneur, there does remain a monetary, peer-group driven benchmark at all points in time.

I maintain, however, that an entrepreneur goes by what he seeks to achieve and feels satisfied with, rather than measure it in terms of sheer opportunity costs.

The challenge is to evaluate your achievements as a package — the independence, the thrill of setting your own direction, the kick of building an organisation, and yes, the wealth you create/distribute in the bargain — and stay charged with the course you take.

On what could prompt a true entrepreneur who built up the company from scratch to sell it off.

Assuming money is not a constraint, there could always be qualitative drivers such as sheer fatigue, necessity to associate with a bigger platform, industry compulsions of consolidation, inabilities among existing management/succession planning.

Entrepreneurs could also take a very hard-nosed approach to ‘monetise’, when enough wealth is created and alternate investment/entrepreneurial vistas are compelling.

In my opinion, however charged-up an entrepreneur is while building out his venture, he must be able to take a clinical view of his business and realistic points at which monetisation makes more sense — does not lower his achievement as an entrepreneur if he chooses to sell at some point.

Spark Capital does not appear to face the problem of high employee attrition rate, a major concern of even very large companies. What is the innovation or the strategy behind this?

We have been lucky on that count so far! There seems to be something we are doing right — don’t know if you could call it a well-devised strategy or innovation.

I can only conjecture it has to do a lot with soft factors, such as the way we conduct ourselves as an organisation, the intellectual energies dedicated to the work-environment, the openness to embrace criticism/new ideas and empower.

It is essential that people get to office feeling like they want to — not look at it as a pressure boiler situation that lasts 10 hours a day.

You had mentioned that being an entrepreneur you would have to face situations when you have to rework your way back from scratch…

I think I was referring to this in the context of how the ‘right entrepreneurs’ should be backed, when evaluating investment or investment banking opportunities.

I believe that often business cycles, industry compulsions, new opportunities and ever-changing dynamics can call for drastic change in strategy, re-starts, complete departures from original plans and restructuring activity.

The good entrepreneur never shies away from these — countenances these ‘change situations’ with as much energy and guts as he originally did!

As entrepreneurs at Spark Capital we have had our fair share of these situations and decision-points and have re-invented ourselves accordingly too.

Do you feel the spirit of entrepreneurship and risk management can be taught?

In my opinion it is more a gut feeling than something that can be ingrained through practice. However, a sense of disciplined thought process to assess opportunity and risks might become a necessary overlay to the gut, if one seeks to be successful in the long run.

On business ethics.

Always err on the right side. Never worthwhile to compromise on ethics.

D. MURALI

KAUSHIK RAM

http://InterviewsInsights.blogspot.com

More Stories on : Interview | Young Investor

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page