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Where ‘sharks’ don’t invest

Manasi Phadke | Updated on: Jan 05, 2022
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Funding innovations in agri sector is high risk, low returns business

Man might well be a social animal, but bulls, bears, doves and hawks are economic animals. The first two prowl about in the share bazars and the last two in central banks. And now they won’t leave the aqua kingdom alone. I am informed that sharks have also made it to the list of confirmedly economic animals.

During my childhood, sharks were also found in the seas, but mostly found in Hollywood horror movies — think Jaws . Since then, they have moved on from the sea into tanks and are now part of a popular TV series ‘Shark Tank’. For the uninitiated, ‘Shark Tank’ is an American reality show in which entrepreneurs with bright, go-to-market (GTM) ideas make a pitch to a panel of investors, called ‘sharks’, to buy a stake in their company.

The entrepreneur comes out with an ‘ask price’, say $0.1 million for a 10 per cent stake in his company, which puts the valuation of the company at $1 million. Sharks typically ask the entrepreneur questions about sales, revenue, GTM strategy, working capital requirement — to quickly figure out the valuation of the company on-the-go and then bite if the bait is good.

If the valuation done by the shark is lower, then ouch! One might get an offer in which the shark agrees to give $0.1 million, but for an 18 per cent stake in the company. If the idea is good and the price is right, you get what you ‘ask’ for. And if the proposal is super-good, the sharks within the tank may even chew off each other’s heads to buy a stake and you might land up getting your $0.1 million for just 8 per cent stake in the company.

It is a show based on finance, marketing and economics, but it became one of the most popular shows in the US and picked up several prime time TV awards through its 13 seasons. Versions of the ‘Shark Tank’ have been launched in seven countries, including in India recently.

The entire interaction requires quick thinking on the part of the investor and the entrepreneur, an innate understanding of the finance of the business, superb presentation and excellent negotiation skills. Strategy, money, glib talk and negotiation — the very elements that power the TRP ratings of a typical Saas-Bahu show.

After all, let us remember that the sharks can see through false valuations precisely Kyunki Saas-bhi Kabhi Bahu Thi . Entrepreneurs of the world, beware. Should you have put on Taarak Mehta ka Ulta Chashma by any chance, the sharks will oust you from the show sooner than Big Boss shows you the door.

Reality TV to reality

Real-life entrepreneurs play out the Kaun Banega Crorepati , but unfortunately without any lifelines or options. A few months ago, I had an opportunity to connect with the ecosystem of agritech start-ups. Whether it is in the space of smart agriculture, precision farming, quality assaying, decentralised storage solutions or uberised transport systems, agritech start-ups have been identifying the gaps that plague Indian agriculture and plugging them with innovative tech solutions.

But when one decides to scale across products, geographies and processes, one needs funds. Bankers often are unable and/or unwilling to evaluate innovative proposals and give debt to newbie entrepreneurs with ideas that could fail. This is where the venture capital funds chip in, evaluate risk-returns in the proposal and take a stake in the enterprise.

The VC brings to the board not only funds, but also contacts, markets and expertise. The fund keeps a hawk eye, or let us say shark eye, on how the business is managed. The VC is interested in increasing the valuation of the firm by, say, eight times (8x) over 4-5 years, after which the VC exits from the investment.

But, in many cases, specifically in sectors such as agriculture or rural development, meaningful innovations have a long gestation period. It is impossible to achieve even 4x valuation in eight years — that is because the basic scale of operations of the innovation may be tiny and focussed on a specific product/issue. There are very few funding options here because bankers don’t like the risks and VCs don’t like the returns.

And, yet, this high risk-low returns innovation could be the exact solution for a long-drawn issue. This is exactly where ‘social impact’ funds can — and increasingly are — make a difference. And that is how innovations can be powered meaningfully in India — sure, we need a shark tank, but then we also need some dolphin pools!

The writer is a brave economist trying to laugh against the odds

Published on January 05, 2022

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