The truth is we don’t know enough about the digital economy. Technology has revolutionised the way we communicate, interact, and transact. Private equity investors have been quick to jump onto this bandwagon. But, they’ve also had the unpleasant task of marking down some of their new-age investments to zero. After all, how does one differentiate an irresponsible cash burner from an ingenious risk taker?

Is there a rule book to forecast the future when it looks nothing like the past and there are no parallels to draw from? Investors know that there’s a fine line between being a believer and being caught in a bubble. Yet even promoters have difficulty pinpointing true value. Companies that floated their IPOs with pomp find their shares languishing a few months down the line. Investors have responded to these trends by either writing off new-age businesses as just another fad or oversimplifying their true drivers of growth. Oddly, investors have something to lose if they look the other way.

In Digital Fortunes, Smarak Swain tries to bring in a more nuanced and balanced perspective of what the digital economy offers investors.

Three broad themes

The book is organised into three sections, each discussing a broad theme. In the first part, Swain breaks down platform economics. He defines what a platform is and how to identify its potential. The second theme is about cryptocurrencies and the underlying blockchain technology. Here he tries to separate the wheat from the chaff. Towards the end, he dwells upon the challenges and risks that regulation must address.

Digital Fortunes aims to provide a framework to value new-age businesses. The book is organised into three parts: breaking down platform economics, blockchain’s uses and limitations, and the regulatory environment. Swain differentiates companies based on their value addition and growth potential. Platform companies have something to offer buyers and sellers, they have long gestation periods, they rely on network effects, and costs are frontloaded. Effectively, making them very profitable businesses in the long run.

Swain begins by acknowledging that new-age businesses have a completely different set of opportunities, challenges, and compliance requirements than their traditional counterparts. Naturally, the metrics and models used to value them must be different.

According to Swain, platforms are late bloomers. He offers many interesting insights on business structures, network effects, and competition. Platform businesses take a long time to stabilise, most costs are front-loaded, and the payoffs are asymmetric. These businesses are in competitive environments.

Turnaround stories

The result is a set of companies with uncertain futures that are vulnerable. Vulnerability is problematic, but uncertainty is not. In the words of Monish Pabrai, “The low-risk, high-uncertainty (situation) gives us our most sought-after coin-toss odds. Heads, I win; tails, I don’t lose much”. The best of the lot must innovate and build moats in new ways. In the digital economy, the winner takes it all. And winning requires sacrifice. Swain warns us of being too quick to write off a loss-making business because they could be turnaround stories. Technology brings speed and scale to the table but networks are the invisible levers that can make or break digital fortunes.

The section on cryptocurrencies is accessible for non-experts. There’s a high-level overview of how blockchain works. Swain analyses the ideological origins of cryptocurrencies: the conundrum of having clear ownership rights and complete anonymity. Through examples, he illustrates that wherever cryptocurrencies have succeeded in this endeavour, there’s been scope for blatant misuse. And every attempt to rein in the damage, results in compromising either ownership rights or anonymity. Swain remains sceptical that cryptocurrencies could unleash significant value. Yet, he believes that the underlying blockchain technology could have broader applications.

The final and shortest section of the book gets technical in parts. It is suited mostly to experts in the field or enthusiasts of regulation. Swain delves into privacy laws, crimes, and accountability.

Readers could expect qualitative inputs on how to value new-age businesses. The book leaves readers with a sense of the prominent characteristics of a new-age business. This could translate into a framework or checklist for valuation. However, Swain does not present a valuation methodology or specific metrics that work for the digital economy. As far as cryptocurrencies go, Digital Fortunes does a great job of explaining what they are, whether they qualify as securities, and the risks of transacting in them. Swain concludes with the idea that some long-term investors might see cryptocurrencies as a “store of value asset” as opposed to a purely speculative one.

Digital Fortunes is a must-read for anyone looking to understand the landscape, key drivers, and opportunities in the digital economy.

The reviewer is Principal Fixed Income Strategist, iThought Financial Consulting

Title: Digital Fortunes: A Value Investor’s Guide to the New Economy

Author: Smarak Swain

Publisher: Bloomsbury

Price: ₹396

Check out the book on Amazon.