Making Money On Disruptive Business Models

Making Money On Disruptive Business Models

Every equity investor wants ๐ก๐ข๐ ๐ก๐ž๐ซ ๐ฏ๐š๐ฅ๐ฎ๐ž ๐Ÿ๐ซ๐จ๐ฆ ๐ก๐ข๐ฌ ๐ข๐ง๐ฏ๐ž๐ฌ๐ญ๐ฆ๐ž๐ง๐ญ๐ฌ, implying that his objective is to maximise the present value of his investments at a given risk given other alternatives.

Yet, we see companies have different strategies to add value. For example, some companies want to capture market share and are willing to negotiate lower pricing against higher volume.ย In my view, cutting prices generates reactions from the competition, and the net effects on value creation can get unpredictable.

For instance, consider the new-age Indian startups in edutech, fintech, or theย #onlinegroceryย segment. Ifย BYJUย cuts prices to gain a higher market share,ย upGradย will react, and the net effect will result in lower margins, but volume will not increase to compensate for lower margins which is a recipe for lower firm value.

Suppose an ๐ข๐ง๐œ๐ซ๐ž๐š๐ฌ๐ž ๐ข๐ง ๐ฆ๐š๐ซ๐ค๐ž๐ญ ๐ฌ๐ก๐š๐ซ๐ž ๐ฅ๐ž๐š๐๐ฌ ๐ญ๐จ ๐ก๐ข๐ ๐ก๐ž๐ซ ๐ฆ๐š๐ซ๐ ๐ข๐ง๐ฌ ๐ž๐ข๐ญ๐ก๐ž๐ซ ๐›๐ž๐œ๐š๐ฎ๐ฌ๐ž ๐จ๐Ÿ ๐ž๐œ๐จ๐ง๐จ๐ฆ๐ข๐ž๐ฌ ๐จ๐Ÿ ๐ฌ๐œ๐š๐ฅ๐ž ๐๐ซ๐ข๐ฏ๐ข๐ง๐  ๐๐จ๐ฐ๐ง ๐œ๐จ๐ฌ๐ญ๐ฌ ๐จ๐ซ ๐ข๐ง๐œ๐ซ๐ž๐š๐ฌ๐ž๐ ๐ฆ๐š๐ซ๐ค๐ž๐ญ ๐ฉ๐จ๐ฐ๐ž๐ซ ๐๐ซ๐ข๐ฏ๐ข๐ง๐  ๐๐จ๐ฐ๐ง ๐œ๐จ๐ฆ๐ฉ๐ž๐ญ๐ข๐ญ๐จ๐ซ๐ฌ. In that case, it will lead to a higher value. However, if this strategy results in lower pricing and margin, the net effect on value creation is negative.

Thus, startups looking to disrupt the status quo often lose value. For instance, ride-sharing companies have displaced traditional cab services companies, but Uber,ย Lyft,ย DiDi,ย Grab, andย Olaย continue to lose money.

Thus, in my view, ๐๐ข๐ฌ๐ซ๐ฎ๐ฉ๐ญ๐ข๐จ๐ง ๐ข๐ฌ ๐ž๐š๐ฌ๐ฒ, ๐›๐ฎ๐ญ ๐ฆ๐š๐ค๐ข๐ง๐  ๐ฆ๐จ๐ง๐ž๐ฒ ๐จ๐ง ๐๐ข๐ฌ๐ซ๐ฎ๐ฉ๐ญ๐ข๐จ๐ง ๐ข๐ฌ ๐œ๐จ๐ฆ๐ฉ๐ฅ๐ž๐ฑ, ๐š๐ง๐ ๐๐ข๐ฌ๐ซ๐ฎ๐ฉ๐ญ๐ข๐จ๐ง ๐œ๐ซ๐ž๐š๐ญ๐ž๐ฌ ๐ฅ๐จ๐ญ๐ฌ ๐จ๐Ÿ ๐ฅ๐จ๐ฌ๐ž๐ซ๐ฌ ๐›๐ฎ๐ญ ๐๐จ๐ž๐ฌ ๐ง๐จ๐ญ ๐ง๐ž๐œ๐ž๐ฌ๐ฌ๐š๐ซ๐ข๐ฅ๐ฒ ๐ซ๐ž๐ฉ๐ฅ๐š๐œ๐ž ๐ญ๐ก๐ž๐ฆ ๐ฐ๐ข๐ญ๐ก ๐ฐ๐ข๐ง๐ง๐ž๐ซ๐ฌ.



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