Technology, Venture Capital, Private Equity

It’s been one hell of a week for the markets, swinging wildly like a yo-yo and if all that wasn’t enough, in the midst of it, we have the Wockhardt IPO fiasco. I can’t recall any other instance in recent memory when such a renowned company had to withdraw its IPO the way Wockhardt has had to.  While the management of the company has blamed it on the prevailing weak market sentiment, it’s clear that there’s more to it and that someone somewhere was being overambitious. It’s just incidental that I have been contemplating and blogging on the interplay between perceptual (or “synthetic” as I referred to it earlier) reality and fundamental reality, and in this case, its quite obvious that there was a huge disconnect between the two.  
From personal experience, even in the course of evaluating funding opportunities (which is what I do for a living), I sometimes come across companies and entrepreneurs (many a time, even reputed ones), where you are forced to ask yourself - “Whats this guy smoking?”.  Examples of companies with almost zero assets trying to raise funds at crazy valuations based on mere academic projections are not uncommon. Even in the past, when I was an investment banker, there have been instances where I was advising clients looking to raise PE funding and the client at the last minute decided to go for an IPO rather than a private placement since the public markets were offering richer valuations. And as professionals in the finance industry, we too are incentivized to sometimes play along. What’s called the greater fool theory - who cares what your investment is really worth as long as you are assured that you will find some other sucker down the line who will be willing to pay more that you have. While that may be one way of looking at it (especially for PE/VC professionals where the likelihood of getting a good exit is definitely a major consideration), one should also never lose sight of fundamentals. For example, a very reputed VC has called the venture capital industry as a “bubbles business” because VCs have made the maximum money when things are in a state of frenzy. However, personally, I’d like to look at it from a more fundamental standpoint and see if the business we are investing into is grounded in reality, solves real problems and hopefully make the world a better place. And as Warren Buffet has very famously proven, such an approach is not necessarily in conflict with the idea of making money.
Coming back to the Wockhard IPO, one of the serious lapses that needs introspection from the regulators is the role of the newly introduced IPO rating agencies. The IPO had been given a 4 on 5 rating, which meant that it had been charecterized as “above average”. The sub prime crisis has already put the rating industry in the US in a cloud and both the regulator and the agencies themselves need to ensure that this nascent move in India doesn’t lose credibility and fall flat because of events such as this. Would like to end with this quote from a conference call with S&P where they were asked by a hedge fund manager who was referring to the agency’s move to downgrade billions of dollars of mortgage-backed securities. He said, “I’d like to understand why you’re making this move today and why you didn’t do this many, many months ago.”
“It’s a good question,” responded the S&P analyst.
“You need to have a better answer,” said the fund manager.