Man in The Mirror

I’m Starting With The Man
In The Mirror
I’m Asking Him To Change
His Ways
And No Message Could Have
Been Any Clearer
If You Wanna Make The World
A Better Place
Michael Jackson, January 1988

48 hours. Two interesting transactions. Verizon buys Yahoo. Flipkart’s Myntra buys Jabong.

Both were widely speculated about but the details are still very interesting. As my multiple screens and feeds buzzed with details and commentaries on the transactions, my mind went back to the strains of the enduring ‘Man in the Mirror’ song by Michael Jackson. Different times. Different contexts. Yet, the same enduring message.

The two transactions hold up a mirror to the venture ecosystem and challenge some closely held beliefs.  Investors like us, and entrepreneurs, need to face reality and in some cases, change our ways.  I have heard from many of the Unicorn/’almost Unicorn’ founders and their ever optimistic investors the familiar chant - “Kuch to ho hi jayega, so many millions have gone into the company.”
Translated it reads - we are too big to fail. The two transactions are a painful reminder that it doesn’t work like that. No one is too big to fail!

Leading with Yahoo, the company was the internet for the first generation of people who went online. The home page is still the most visited single page (excluding google.com) on the entire world wide web with 43 million visitors a day. The $4.83 billion price tag is a far cry from Yahoo’s peak market capitalization of approximately $125 billion and from the $20 billion that Microsoft was willing to pay in November 2008. The company has invested $11-12 billion* in the core business including acquisitions. This represents a return of about 40 cents to the dollar! For all the naysayers, Yahoo Japan shows what could have been possible. In a market that is a third of the U.S. market, the Japanese company is a market leader and has a market capitalization of $ 26 billion.

Jabong is a similarly cautionary tale. The company got off to a super quick start helmed by young, aggressive founders and backed by Rocket Internet. Jabong reportedly refused an acquisition offer from Amazon of $700-800 million and at its peak was valued at $1.2 billion. Over $275 million* was invested in the business, which eventually sold for $70 million, returning about 25 cents to the dollar. The $70 million actually represents a good outcome as till just a few months back, the company could not be sold for even half that amount. Timing is everything. Flipkart acquired Myntra, at that time a smaller business than Jabong is today, for $300 million in 2014, albeit with a stock component.

The Yahoo experience also teaches another important lesson to investors and entrepreneurs. Only a few, key decisions matter – you can make a lot of mistakes! Despite all the hand wringing and what could have been, two decisions saved the company. First, the decision to partner with Softbank and create Yahoo Japan in 1996 and second, the decision to invest $1 billion in Alibaba in 2005. Both must have been difficult decisions, especially the latter, but they ended up paying off spectacularly. Apart from these, Yahoo made a lot of poor acquisitions that only enriched the sellers. It is also interesting to note that both the deals originated from Jerry Yang’s connect with Softbank and Alibaba. Notch one up for the founders in the founders versus professionals debate!

Schadenfreude anyone? The point of writing this is not to indulge in good old fashioned bashing of what has already happened. But to point out that the world is a crazy place where valuations can swing dramatically and capital invested is no guide to eventual returns. There is no law that protects capital investments, however large they maybe. Things that work in one context don’t always work forever. The only constant is business performance and cash flow that allows businesses to survive. Valuations will go up and they will go down but if you are around then you can take advantage of the cycle. As the old adage goes, to finish first, you have to first finish…

The man in the mirror is saying that founders, startups and investors should celebrate business successes rather than funding rounds!

(Sarbvir Singh is an experienced venture capital investor in India and was the founding Managing Director of Capital18. The portfolio of companies that he has worked with include BookMyShow, Yatra and Webchutney among others.)