Opinions

Mutual Fund Investments in Private Market – Are they trying to replicate the VC investments?

by Sandeep Kumar

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The emerging scope for institutional investors in the secondary markets 

The growth and performance trajectory of start-ups have increased significantly in the recent years as compared to what it was a decade ago. As a result, the secondary market for private equity has witnessed a steep upward trend as the value of private equity is booming. It is expected that the secondary market volume will reach $100 Bn this year. While there are several parties involved in private equity investments, our focus for this article will be around VCs and Mutual Funds. We will also try to analyse the extent of involvement of Mutual Funds. 

Liquidity and return on capital serve as major factors that affect investment decisions of institutional investors. To ensure greater liquidity, it is important that institutional investors have easy access to the private markets, either directly or through their advisors. Mutual Funds help provide these benefits to investors. As a result, it has started to gain traction as a new asset class in the market with aggregate valuation of mutual funds’ investments in private firms increasing from $16 Mn in 1995 to over $8 Bn in 2015.

VC Funds versus Mutual Funds – Which brings more liquidity?

With growing participation of Mutual funds in private equity, it may seem that they are following the track of VC firms. But let us understand how the two differ in terms of their rights in the private markets.

While VC firms support startups from their early stage to their growing stage, Mutual Funds specifically focus on later stage investments in startups. The latter are distinctively concerned about the liquidity benefits. As a result, Mutual Funds are more concerned about redemption rights compared to VCs. These redemption rights not only help with liquidity management, but also protect the investors from consequences of down-IPO

The IPO-related rights are given much more importance in Mutual Funds. They are more likely to have at least one of the two IPO-related rights, which includes a promise to investors about certain return in an IPO, and veto rights on down-IPOs. But in order to win some, one has to lose some. Therefore, Mutual Funds enjoy lesser direct control rights compared to VCs.

What kind of unicorns do mutual funds invest in?

Mutual funds are more likely to invest in the later stages of startup funding, as during a firm’s later stage funding rounds it is easier to assess their performance and it also guarantees higher growth than young startups. These generally include large firms that are closer to a potential IPO. Firms that have greater workforce and are looking forward to doubling its size, have a higher probability by 4-5% of mutual fund participation in rounds.

VCs play an important role in the investment participation of Mutual Funds as they are more likely to invest in funds that are backed by experienced VCs. The experience and intellect of the VCs ensure more credibility, better monitoring and greater social capital. Moreover, with greater resources, larger funds are more likely to invest in unicorns. Particularly, larger funds with less volatile fund flows are more likely to invest in private firms, consistent with liquidity concerns.  

Source: Chernenko et al (2020)

Benefits of Mutual Funds that serve as gateway for average investors 

Pre-IPO investments are difficult to access for average investors. Mutual fund investors provide a chance to these investors to put their funds in unicorns indirectly. They make PE investments easy to access, without compromising  on the liquidity. Fidelity’s Contrafund, is one of the biggest and widely-held mutual funds. Another example is The New Horizons Fund.

With a booming market of private equities, more and more investors are moving to the space as they too want to be benefitted from the hyper-growth phase of unicorns before they go public. Mutual funds are responding to the needs of the investors to grab on the early access by allocating a portion to private space. They provide transparency to investors as they publicly disclose their portfolio holdings. These benefits of easy accessibility to private markets and greater transparency are the reasons why mutual funds are gaining traction among investors.

 

Returns and Benefits attracted by Mutual Funds through Pre-IPO Investments

As mentioned earlier, Mutual Funds focus more on contractual provisions, particularly the redemption rights that would allow them to escape the sticky situation if the IPO is delayed, or IPO ratchet that protects them from down-side IPOs by issuing additional shares that places the investor in the same or nearly same position had the IPO been priced at the previous valuation.

It is important to note that Mutual Fund investments essentially take place in the later rounds of funding, before the company goes public. This ensures greater returns than the public market returns. It is estimated that mutual funds’ returns swell up by 67% to 161% higher in the private equity market, compared to those on broad public market indices. Another positive aspect of such pre-IPO investments is that the fund is able to obtain optimum allocation in a company’s IPO as they are underpriced by an average of 15%. Thus funds are able to enjoy greater equity ownership than they would, had they invested in the company post-IPO.

 

Are founders comfortable selling their stakes to Mutual Funds and why?

It seems that the private firm owners don’t mind mutual funds investing into their businesses. This is evident from the figure below that shows a steep rise in the aggregate holding of mutual funds in unicorns since 2014. The main reasons why these companies go public is that it provides provision of capital, greater liquidity, and a more dispersed shareholder base. Mutual funds provide all these benefits to these firms, while staying private. 

Source: Chernenko et al (2020)

Even though participation of Mutual Funds in the private markets is often compared to that of VCs, we can see that they both differ in their objectives and the investment preferences. Data suggests that about 149 funds across 14 largest fund families have invested in 270 unique, VC-backed private companies over the years 1995 to 2016. Looking at the trends, the growing need for higher returns in new asset classes will push more investors to adopt this route towards private equity investment.

 

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This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

Internet Of Things: Building a Connected World Through Powerful Technologies

by Sandeep Kumar

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Internet of Things (IoT) is one of the most prominent technology trends, IoT is disrupting both the consumer (retail, healthcare, and services) and industrial sectors, such as transportation, water, oil and gas, agriculture, and manufacturing. In the manufacturing sector, the business of extracting and transporting oil and gas is filled with challenges. There are several drivers of growth for this sector. A report by McKinsey mentioned that the number of businesses that use the IoT technologies has increased from 13% in 2014 to about 25% today. And the worldwide number of IoT-connected devices is projected to increase to 43 billion by 2023, an almost threefold increase from 2018. The IoT cloud platform market is expected to grow from US$ 6.4 Bn in 2020 to USD$ 11.5 Bn by 2025. The IoT solution segment has dominated the overall IoT monetization market.

The trend in the market is expected to continue both as a result and an impetus of constant technological advancements. The pandemic, along with our lives, has also affected the way this trend is developing. In a world where work from home is a norm, more intelligent automated scheduling and calendar tools, as well as better quality, more interactive video conferencing, and virtual meeting technology will be required while working remotely. Healthcare witnessed a drastic change in the way it is delivered from telemedicine to smart wearables to sensors.

Source: Pitchbook, Gartner

IoT is not just a technology initiative anymore, after the worldwide lockdown imposed by the pandemic businesses will look for ways to improve efficiencies. The emphasis on the business outcome from implementing has increased significantly IoT initiatives are no longer driven by the sole purpose of internal operational improvement.

Industry Performance in the Recent Years

The global market for Internet of things (IoT) end-user solutions is expected to grow to $212 Bn in size by the end of 2019. The technology reached 100 Bn in market revenue for the first time in 2017, and forecasts suggest that this figure will grow to around 1.6 Tn by 2025.

Source: Pitchbook, Gartner

Key Highlights

• In 2021, there are more than 10 billion active IoT devices. In 2019, around 127 new devices per second connect to the web.

• It’s estimated that the number of active IoT devices will surpass 25.4 billion in 2030.

• 83% of organizations have improved their efficiency by introducing IoT technology.

• The amount of data generated by IoT devices is expected to reach 73.1 ZB (zettabytes) by 2025.

• In 2018, 57% of businesses adopted IoT in some way. By the end of 2021, the figure should hit 94%.

VC Investment Sentiments

VCs poured close to $11.1 Bn in IoT companies in 2020, though the deal count was less the total was on 2018 level. Majority of the drop came from early stage VC deals, which fell to its lowest since 2016. At the product category level, the IoT-compatible chipsets, manufacturing & supply chain, connected vehicles, smart home, and IoT security segments each raised over $1 Bn in VC, driving the year’s total deal value.

Instead of a sole value driver IoT is more suited for driving diversified software and hardware companies. Business dealing in connectivity devices, energy and utilities and connected commercial real estate witnessed sharp increase in funding. Each segment drew over 2x gains in deal value YoY, although each was dramatically affected by the pandemic.

The IoT industry set VC exit records in 2020, achieving $14.0 billion in total value across 61 exits. Exit values have never crossed $4 Bn in previous years. The star of the show was C3.ai, which had a record $3.4 Bn IPO in the US market. 2020 was also a strong year for M&A activities with 48 deals valuing up to $2.8 Bn. IoT hardware, IoT software, and connected buildings generated most of the activity.

Segment-wise Analysis of Performance and Opportunities

 IoT Hardware and Devices

The IoT hardware includes sensing devices that have the capabilities to collect and route data to enable control and communication through the internet. Continuous innovations in chipsets, sensor systems, and connectivity devices for IoT networks, may result in an innovator’s dilemma for the incumbents. However, startups have an advantage as they can experiment and develop freely. The reducing cost of production for IoT hardware and greater connectivity are driving the market. Moreover, as the devices are becoming cost efficient, it has encouraged their adoption and innovation.

It is estimated that the IoT hardware market constitutes nearly 48% of the total IoT industry and would reach $271 Bn by the end of 2021, growing at a CAGR of 12% during 2021–2026. The segment had a positive response from VC investment last year, raising over $2.5 Bn. During the pandemic, China was in particular the driver of deal flow in the segment. The custom chips for IoT applications witness higher inflow of funds from China compared to the USA.

One can capture great market opportunities within the segment by focussing on future possibilities for growth in Tiny ML microcontrollers and battery sensors. It is projected that the Tiny ML device market would grow at a CAGR of 41% from 2021–2024. Some startups that are already focussing on this opportunity are Arm, Greenwaves, Syntiant, etc.

 IoT Networking Infrastructure

The IoT network connects the device data to cloud networks. The segment is expected to witness growth as the governments across the world provide incentives for building smart cities, and enterprises prefer novel networking for asset tracking and predictive maintenance.

So far, the segment is expected to grow with a CAGR of 17% from 2020–2022. The investment deal activity has relatively plateaued in 2020, but still managed to raise over $500 Mn last year. Majority of the VC investments have inclined towards 5G technology. Some firms that appear to benefit from growth in 5G are EdgeQ, Blue Danube, Siklu, among others. However, the pandemic has delayed the execution and deployment of 5G technology.

 IoT Software Solutions

IoT softwares enable various functions throughout the IoT value chain. These include connectivity routing, application enablement, device management, data management and analytics, etc. Analytics is required in almost every field today. Therefore, IoT devices with abilities such as sensory data, AI and ML algorithms will witness a huge market opportunity.

The market for IoT software is expected to grow at a CAGR of 11.4% from 2021–2024. However, the share of the segment in total market for IoT is expected to decline over time as more processing shifts onto the devices themselves. AI and ML play an important role in driving the segment due to its widespread adoption. It is suggested that startups will be able to provide improvements in the area by upto 10x, making it a competitive marketplace. Some companies that are already working in this direction include C3.ai, SparCognition, FogHorn, Noodle.ai, among others.

 IoT and Industry 4.0

Industry 4.0 includes IoT technologies that facilitate the growth of smart capital intensive industries, including manufacturing, agriculture, energy and utilities. Such technologies are largely implemented to empower autonomous equipment operations.

The segment is projected to grow at a CAGR of about 23% during the period 2021–2028. The VC investment in the segment remained strong even during the pandemic due to faster adoption of digital operation in capital-intensive industries. There are several opportunities within this segment that are expected to witness fast growth in the coming years. These include asset-tracking, drones, predictive maintenance using ML, among others. Samsara, CloudLeaf, Embention, Clobotics are some companies that will benefit through their operations in these areas.

 Smart Services and Infrastructure

IoT can be a great help in offering smart assistance through smart healthcare, connected mobility, smart cities and other consumer services. These innovations will also favour the goals of sustainability and positive environment impact.

The market is expected to reach $200 Bn by 2021 and is projected to grow at the annual rate of 13%. Investments in connected services, particularly healthcare and vehicles have grown even during the pandemic. The demand for vehicle connectivity is expected to grow in the future as it is suggested that 60% of vehicles will have vehicle-to-vehicle connectivity (V2V) by 2023. Some companies that are expected to progress in the smart mobility and smart healthcare services segment are Kymeta, Smartdrive, Whoop, etc.

Industry Outlook and Key Limitations

 

Large internet of things (IoT) and operational technology (OT) security companies can be built across segments of the edge device value chain as well as for individual device types. However, IoT-focused platforms are limited in addressing the leading use cases for IoT security spending including manufacturing, natural resources, and transportation given devices’ limited connectivity to the cloud.

To overcome the industry’s concerns, security incumbents will be expected to address IoT security across the value chain and across product kinds. To date, security software providers have sought to address the IoT security opportunity with point solutions that aren’t tailored to specific industry threats. As a result, IoT security adoption is still low and uneven across organisations. More comprehensive vulnerability assessment and communications security capabilities will be included in future XDR platforms. As a result, we expect infosec incumbents to continue to improve their IoT security capabilities throughout the value chain.

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This article has been co-authored by Ayush Dugar and Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

Green Bonds: An efficient instrument for financing environmental goals

by Sandeep Kumar

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Investing in projects with environmental benefits

Climate change is a major problem in today’s world and it affects almost every sector in the economy, directly or indirectly. One way through which we can combat this problem financially is through Green Bonds. Green Bonds, like any other bond, is a fixed-income instrument that focuses on mobilizing resources from domestic and international capital markets and channelizes it for environment-friendly projects, such as sustainable waste management, renewable energy, pollution prevention, etc. The risk and returns involved are similar to the traditional bonds.

The World Bank is the largest issuer of Green Bonds. According to the World Bank’s 2020 Impact Report, 111 projects are eligible for green bond financing. Since 2008, it has issued $14.4 Bn in bonds with 164 green bonds across 22 currencies. About $1 Bn equivalent in bonds were issued in FY 2020.

Source:World Bank Impact Report 2020

Emerging trends and evolution of green bonds

Since its inception in 2007, the green bond market has reached cumulative issuance worth $1 Tn. The volume of labelled green bonds has been increasing steadily since 2013. It had issuance worth $280 Bn in the year 2020. With greater emphasis on environmental, social, and governance (ESG) objectives, the green bond market is still evolving and has started to gain its popularity.

Source: Climate Bonds Data Intelligence Reports

Green Bonds can be broadly classified into the following categories:

● Use of Proceeds Bonds– These are standard recourse­-to-the-­issuer debt that has the same credit rating on the stock market as the issuer’s other bonds. An example of this is the European Investment Bank’s Climate Awareness Bond. It has raised €7.6 billion during the period 2007–2014.

● Revenue Bonds- These are debt instruments with non-recourse-to-the-issuer. Its proceeds generated by fees, taxes,etc. are reserved for green or environmentally friendly projects. For example, AAA rated revenue bonds worth $321.5 Bn issued by Iowa Finance Authority which were backed by water­ related fees and taxes collected by the State.

● Green Project Bond- These project bonds are involved in the development of one or more environment-related projects for which the investor has direct exposure to the risk. For instance, a US development finance institution, OPIC, had issued $47 Mn worth of green guarantees for US investors. The amount will be used to invest in a photovoltaic project in Chile, called the Luz del Norte project.

● Green Securitized Bonds- These bonds are collateralized by one or more specific projects, where the first source of repayment is generated through the assets.It is similar to how the US based solar installer SolarCity Corp entered the green bonds market by backing it with solar lease agreements.

Cost efficiency and growth in revenue achieved with the issuance of green bonds

Various costs are involved in the issuance of bonds, which may depend on the value of the bond, complexity of the deal, taxes, issuer’s risk profile and other things. In case of green bonds, the fee is generally calculated as a fraction of the market face value of the emission. Thus, the cost of issuance of green bonds may vary from a few thousands to millions of USD.

Moreover, compared to conventional bank loans, green bonds have a positive impact on the profitability of environment-friendly projects. This is indicated by higher IRR for shareholders. Higher IRR is attributable to lower financing costs of green bonds relative to bank loans.

Green bonds have proven to be more efficient towards sustainability goals, compared to other means of financing. According to Asian Development Outlook, on an average, Asian firms that issue green bonds improve their environmental performance by 30% after 2 years. Additionally, companies that issue green bond issuers have proved to show greater resilience during the pandemic.

Regulatory and tax incentives

Taxes may hurt when it swallows a part of your investment returns. An added advantage of green bonds is that they come with tax incentives. Since green bonds are built exclusively to develop projects that are beneficial to the society, green bond holders enjoy tax exemptions and tax credits, making it more attractive compared with traditional bonds.

In order to classify a bond as a green bond, it must go through a process of third party verification to ensure that the proceeds are directed towards environment projects. Institutions like the International Capital Market Association’s Green Bond Principles and the Climate Bonds Initiative’s (CBI) Climate Bond Standards help in this classification. Green bonds are usually governed by the following principles:

● Use of Proceeds — issuer should specify the category and clearly mention the definition of environment benefit of green project towards which the proceeds will go.

● Project Evaluation and Selection Process — issuer must give an overview of its investment decision making process

● Management of Proceeds — proceeds should be managed through a sub-portfolio or attested to by a formal internal process that should be disclosed

● Reporting — details of investments made from proceeds and environmental benefits achieved should be regularly reported.

Feasibility and challenges in issuance of green bonds

The above principles ensure transparency in the use of proceeds which would help investors in making the right decisions for their investments. However, often the reporting standard is weak in the bond market. Since the value of the bond depends on a number of factors including complexity of the deal and issuer’s risk profile, it leads to variation in the cost of issuance. Low value issues in developing countries sometimes make other financial options more affordable.

Growing focus and impact assessment of green bonds

It is evident that green bonds have started to gain popularity as there has been greater awareness towards environment issues and climate change. The market is still new and it has a lot of potential to evolve along with the economic environment. Its direct impact lies in the performance of the underlying project and has the potential to drive nations towards net zero. Several multilateral development banks have adopted a harmonized framework for impact reporting of green projects which is expected to allow a more stringent measurement of impact. Transparency, agreed standards and principles, Measurement, Reporting and Verification (MRV) are important drivers of incentives.

As awareness about the environment is increasing, the green bond market will surely see a bright future. Even though it does not guarantee high returns, socially responsible investors are still investing in these tax efficient bonds to get the positive environmental returns. Green bonds will prove to be a promising instrument to achieve net zero along with some fixed income.

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This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

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Mutual Fund Investments in Private Market – Are they trying to replicate the VC investments?

by Sandeep Kumar

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The emerging scope for institutional investors in the secondary markets 

The growth and performance trajectory of start-ups have increased significantly in the recent years as compared to what it was a decade ago. As a result, the secondary market for private equity has witnessed a steep upward trend as the value of private equity is booming. It is expected that the secondary market volume will reach $100 Bn this year. While there are several parties involved in private equity investments, our focus for this article will be around VCs and Mutual Funds. We will also try to analyse the extent of involvement of Mutual Funds. 

Liquidity and return on capital serve as major factors that affect investment decisions of institutional investors. To ensure greater liquidity, it is important that institutional investors have easy access to the private markets, either directly or through their advisors. Mutual Funds help provide these benefits to investors. As a result, it has started to gain traction as a new asset class in the market with aggregate valuation of mutual funds’ investments in private firms increasing from $16 Mn in 1995 to over $8 Bn in 2015.

VC Funds versus Mutual Funds – Which brings more liquidity?

With growing participation of Mutual funds in private equity, it may seem that they are following the track of VC firms. But let us understand how the two differ in terms of their rights in the private markets.

While VC firms support startups from their early stage to their growing stage, Mutual Funds specifically focus on later stage investments in startups. The latter are distinctively concerned about the liquidity benefits. As a result, Mutual Funds are more concerned about redemption rights compared to VCs. These redemption rights not only help with liquidity management, but also protect the investors from consequences of down-IPO

The IPO-related rights are given much more importance in Mutual Funds. They are more likely to have at least one of the two IPO-related rights, which includes a promise to investors about certain return in an IPO, and veto rights on down-IPOs. But in order to win some, one has to lose some. Therefore, Mutual Funds enjoy lesser direct control rights compared to VCs.

What kind of unicorns do mutual funds invest in?

Mutual funds are more likely to invest in the later stages of startup funding, as during a firm’s later stage funding rounds it is easier to assess their performance and it also guarantees higher growth than young startups. These generally include large firms that are closer to a potential IPO. Firms that have greater workforce and are looking forward to doubling its size, have a higher probability by 4-5% of mutual fund participation in rounds.

VCs play an important role in the investment participation of Mutual Funds as they are more likely to invest in funds that are backed by experienced VCs. The experience and intellect of the VCs ensure more credibility, better monitoring and greater social capital. Moreover, with greater resources, larger funds are more likely to invest in unicorns. Particularly, larger funds with less volatile fund flows are more likely to invest in private firms, consistent with liquidity concerns.  

Source: Chernenko et al (2020)

Benefits of Mutual Funds that serve as gateway for average investors 

Pre-IPO investments are difficult to access for average investors. Mutual fund investors provide a chance to these investors to put their funds in unicorns indirectly. They make PE investments easy to access, without compromising  on the liquidity. Fidelity’s Contrafund, is one of the biggest and widely-held mutual funds. Another example is The New Horizons Fund.

With a booming market of private equities, more and more investors are moving to the space as they too want to be benefitted from the hyper-growth phase of unicorns before they go public. Mutual funds are responding to the needs of the investors to grab on the early access by allocating a portion to private space. They provide transparency to investors as they publicly disclose their portfolio holdings. These benefits of easy accessibility to private markets and greater transparency are the reasons why mutual funds are gaining traction among investors.

 

Returns and Benefits attracted by Mutual Funds through Pre-IPO Investments

As mentioned earlier, Mutual Funds focus more on contractual provisions, particularly the redemption rights that would allow them to escape the sticky situation if the IPO is delayed, or IPO ratchet that protects them from down-side IPOs by issuing additional shares that places the investor in the same or nearly same position had the IPO been priced at the previous valuation.

It is important to note that Mutual Fund investments essentially take place in the later rounds of funding, before the company goes public. This ensures greater returns than the public market returns. It is estimated that mutual funds’ returns swell up by 67% to 161% higher in the private equity market, compared to those on broad public market indices. Another positive aspect of such pre-IPO investments is that the fund is able to obtain optimum allocation in a company’s IPO as they are underpriced by an average of 15%. Thus funds are able to enjoy greater equity ownership than they would, had they invested in the company post-IPO.

 

Are founders comfortable selling their stakes to Mutual Funds and why?

It seems that the private firm owners don’t mind mutual funds investing into their businesses. This is evident from the figure below that shows a steep rise in the aggregate holding of mutual funds in unicorns since 2014. The main reasons why these companies go public is that it provides provision of capital, greater liquidity, and a more dispersed shareholder base. Mutual funds provide all these benefits to these firms, while staying private. 

Source: Chernenko et al (2020)

Even though participation of Mutual Funds in the private markets is often compared to that of VCs, we can see that they both differ in their objectives and the investment preferences. Data suggests that about 149 funds across 14 largest fund families have invested in 270 unique, VC-backed private companies over the years 1995 to 2016. Looking at the trends, the growing need for higher returns in new asset classes will push more investors to adopt this route towards private equity investment.

 

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This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

Paytm: What you need to know about the Indian Payments Solution Giant, and the would-be Billion Dollar IPO

by Sandeep Kumar

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Paytm or Payment through mobile is India’s leading payment processing, commerce, and digital wallet application. It’s a brand of the parent company One97 Communications and was launched by Vijay Sharma in 2010. The app allows you to carry out various transactions from paying your local vendor to paying your electricity bill and much more. It started as an online payment and recharge service and transformed into a virtual and marketplace bank model providing several services like mobile banking, recharge, online marketplace, etc. Paytm has catered to more than 250 million users in the last 8 years. It has the capacity of handling more than 5000 transactions per second.

Snapshot

How does Paytm make money and its revenue stream?

Paytm was initially launched as a bill payment and mobile recharge platform, later it introduced several other services on its platform and came up with the concept of Paytm Wallet, Payments Bank, and online marketplace.

 

Cost structure

Paytm serves a large number of users, which is why it is so cost-driven. Its platform and customer acquisition account for the majority of its costs. This is a common expense faced by many organizations around the world where the cost of acquiring new customers is very substantial. The amount of money spent on this process is more than the returns earned.

 

Valuation and funding history

Global peer comparison

The story so far

According to data released by the National Payment Corporation of India (NCPI) number of digital payments per capita currently is 22.42 per month. The cumulative value of transactions made through payment gateways stood at INR 29.5 Tn ($40 Bn). Also, the payments sector has the highest number of fintech startups. According to IBEF Digital payments in India are expected to increase over three-folds to INR7092 Tn ($100.61 Tn) by 2025 on account of government policies. Mobile payments will drive around 3.5%of total digital payments of INR7092 Tn (US$ 100.61 Tn) by the financial year 2025, up from the current one percent.

Market scenario

India had always been a cash-obsessed economy and now it’s one of the leading countries adopting technology and digitization across its industries. The digital payment market, though adolescent is exciting. Both the public and private sectors are going through rapid digital transformation driven by the increasing use of mobile internet and progressive regulatory policies. The sector has been evolving since demonetization and the pandemic has accelerated the digital shift. A coming couple of years will witness a completely new way of how money moves within the Indian economy.

Impact of e-commerce

The growth of e-commerce along with the emergence of digital wallets played the role of catalyst for digital payments. The e-commerce payments market historically dominated by cash is evolving to meet the demands of its increasingly smartphone-led online shopping culture, with cards and digital wallets rising in prominence. Cards are the most commonly used online payment method despite the fact that credit card penetration per capita is 0.02 and debit card penetration is 0.64. Digital wallet is the fastest growing method and accounts for more than a quarter of all e-commerce payments. To lure the consumers, the digital wallets doled out lucrative offers and cashback to get consumers on board using the payment channel.

Market competition

The market is a highly competitive one with that the NCPI of India has set out new guidelines for digital payment apps limiting their share in the overall volume of transactions on the unified payment interface at 30%. The UPI segment is dominated by PhonePe and Google Pay who have a combined share of more than 80%. The digital wallet segment is completely dominated by Paytm with close to 50% market share. Paytm has taken an integrated route by adding multiple services in its portfolio such as lending, Insurtech, Weathtech, payments bank along with EDC terminals, gateway aggregator & e-commerce. Similarly, PhonePe is offering Insurtech and Weathtech, and Google Pay will be entering into lending and Insurtech.

Value propositions

Paytm offers a variety of services some of the prominent offerings are recharge, top-ups, tickets, hotels and etc. It then diversified into new services like the digital wallet with a match-making model. The two customer groups of the company are the individual account holders that deposit money in the wallet and the merchants who accept the payment. To increase the attractiveness and adoption of various new lines of services targeting the two customer bases were started:

Value creation

Companies are benefitted from the ability to receive a wide range of digital payment methods, both online and in-store. Along with the more traditional ways like debit and credit cards, this also includes a few nascent innovations such as QR codes, Paytm’s own digital wallet service, and United Payments Interface.

Future plans, innovations, and alliances

Paytm is en route to becoming a full-stack financial services provider. Setting up the digital bank and venturing into Weathtech and Insurtech, the company has entered into quite a few key strategic partnerships. To forward their Insurtech plan the company acquired Raheja QBE General Insurance Company, a provider of general insurance plans. Paytm also strengthened up its credit offerings by tying up with SBI Cards to provide contactless credit cards. Paytm Payments Bank was proactive in entering into a partnership with ride-hailing companies like Ola and Uber. This will empower more than 1 lakh driver-partners to conveniently use Paytm FASTags and seamlessly commute across the country, according to Paytm.

Digital gold

Owing to the digitization of the Indian gold market in recent times, Paytm has collaborated with MMTC-PAMP (a well-known gold refiner), to provide a safe platform for its users to purchase, sell and store digital gold. Paytm claims to facilitate the purchase of 99.99% pure gold for as low as Re.1 and store them at an insured vault for no cost.

Conclusion

A mobile wallet’s value proposition includes not only the payment services but also the value-added services that can be provided in a mobile-enabled environment. In a fast-changing and extremely competitive world, no one wants to be left behind in the fight for customer acquisition. Paytm has evolved rapidly and has earned a name for itself in the Indian financial and business sectors. The fact that it grew from a small startup to a massive corporation in such a short period of time demonstrates the further opportunities for growth in the digital space and how innovation is being used effectively in India.

This article has been co-authored by Ayush Dugar and Pranav Agarwal, who is in the Research and Insights team of Torre Capital.

 

“All that glitters is not gold” — Growing valuation bubble of Indian start-ups

by Sandeep Kumar

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 The valuation game

The Venture Capital valuation is a simple game, but never an easy one. While there is little to learn, to play it perfectly takes years, if not decades of experience under the belt.

So how do the VCs arrive at that valuation figure? Market Opportunity? Product Market Fit? Strong Founder Team? Disruptive Product Offering? Extensive Network Economics?

Nah.

Capital invested divided by the stake diluted. That’s it!

The VC chooses the amount of capital he is ready to deploy and the stake he wants to have in the company. Of course, the wish is to part with the least capital for the most stake. Now coming up with these two numbers, the capital chunk to invest and the amount of stake to buy, this is where experience comes in.

The winning bet in your portfolio

Most VCs have personal favorite ranges which they are comfortable with. Some VCs may like to hold only a few concentrated bets while others may want to deploy small amounts into numerous startups. The premise is the same. Each VC wishes to hold at least one winner in its portfolio, the winning bet that ‘returns the fund’.

This gets us to staging. The valuations do nothing to the VC portfolio, except increase the unrealized returns section, which, as the name suggests, are ‘unrealized’ and don’t mean anything unless the company makes an exit from that valuation.

But what if the company is not yet ready for an IPO or a buyout?

The VCs of course know this. Hence when they get together to finance a startup at some stage, let’s say series A, they are offering just enough money to take the startup to the next funding stage. This continues until the IPO or buyout.

Nowhere do the VCs use the DCF or any other model to find a fair value of the shares of the startup. Startup valuation is not a valuation game, it’s a pricing game. It is not about finding a startup trading at a lower than its fair value price and hoping the market corrects itself, the game is about finding another buyer who will be ready to pay higher. All this has nothing to do with cash flows generated from the assets held by the startup, adjusted for the underlying risks of all sorts (DCF basically). All these valuations are nothing more than exhaust fumes as suggested by Fred Wilson, an NYC based VC:

“Early-stage valuations aren’t valuations. They are the exhaust fumes of negotiation about two things — the amount raised and the amount of dilution.”

The information asymmetry

Now let’s take a look at what we have: You are a VC that is trying to get a stake in some startup. What do you do to get an idea of how much you should pay? You don’t have DCF or any other model to help. So, you look at what similar companies have been valued at. With new business models operating in diverse geographies, you realize that it is hard to say how you can define a similar company. Let’s say you came up with food delivery as one category. Despite the difference in the business models, one can hardly cobble together a list of 4–5 startups in the Indian space.

So, the VC game is plagued with opaque, inconsistent deal information. While the figures the VC arrives at are most probably wrong and have nothing to do with reality, they have nothing to worry about as long as they are able to find someone who’s ready to buy at a higher price from them.

The Indian startups in numbers

The past few years have been a gala time for the Indian startups who have managed to secure funding unabated despite the pandemic and its blues.

Startups in India managed to raise $7.8 Bn until April itself. This is a significant number almost 70% of the total $12.1 Bn raised in 2020 and more than 50% of $14.2 billion raised in 2019.

The average funding size has increased to $25.21 Mn, up from $14.94 Mn in 2020. There have been 402 funding rounds until April itself, against 1,114 deals in 2020 and 1,036 in 2019.

Overvaluation and the global landscape

The push towards absurd overvaluations has been a result of the negative interest rate environment. Post the GFC, there was heavy lending and even more borrowing. So much so that people had to pay up money just so that they could lend money. Of course, this led people to look for alternative avenues to park their money and generate juicy returns. The baseless optimism and hollow belief in spotting the next Bezos, Zuck, or Musk have led to an audacious amount of money flowing in, creating completely senseless valuations, having no roots in reality.

Tesla, more than $13 Bn in debt at the end of last year, recently had a market capitalization of $160 Bn, greater than General Motors and Ford combined. At the IPO price, Square was valued at close to $3 Bn, which is 50% below the $6 Bn valuations for which it had raised money from private investors a year before. Uber which in accounting terms stands at around 5x times its revenues, is also grossly overvalued as it is nowhere close to being the leader in the driverless car’s space. WeWork tried to go for a $47 Bn listing but ended up getting corrected to $8 Bn.

The WeWork fiasco was dubbed as a wake-up call in a Morgan Stanley report stating that the days of ‘’ were over.

Unicorns were considered rare. Today, however, the United States has a herd of more than 100 of them, with 100 more outside the US. Each worth a billion dollars or more.

Will history repeat itself?

Let’s talk about the Indian scenario and the startups which we believe are overvalued and most likely to come back to their intrinsic value as and when the markets correct themselves.

1. Byju’s: World’s most valuable Ed-Tech Company

Byju’s operates an online learning platform. It also creates a mobile app for pupils that offers a variety of learning activities. Exam preparation classes are also available. Original material, watch-and-learn movies, rich animations, and interactive simulations are all available to users on the site. The firm is having an EV/Revenue multiple of 17x.

It is the only major player in the Ed-Tech space in India, which has led the company to raise multiple rounds of funding and leading to an enormous increase in valuation. Knowledge in today’s world is free, however, Byju’s creates unique content with animation and the product often seems to be overpriced. In recent times there were a number of instances on various social media platforms where people questioned the pressure on the sales team and how Byju’s is so concerned about their sales when they try to push their offering in the market.

In the long run, the expected return from Byju’s is questionable. Below is the chart of the revenue and valuation of Byju’s over the last five years.

2. Cred — The borrower’s messiah

Losses in billions of dollars are nothing new for hyper-funded companies, especially when they’re chasing size and consumers at any cost. CRED’s metrics tell a tale in and of itself. CRED has made a profit of $71,000 in its second year of operation. CRED hasn’t been able to monetize its user base in FY20, despite acquiring a large customer base with a high propensity to spend and consume.

While the two-year-old company’s sales remained low, its total expenditure increased by more than 5.9 times to $52 Mn in FY20, compared to $9 Mn in FY19. The greatest cost center for the financial firm was advertisement and marketing, which accounted for 47.6% of total expenditure. From $3 Mn in FY19, such costs increased by 9.3 times to$25 Mn. During the fiscal year that ended in March 2020, CRED spent Rs 726.7 to earn a single rupee of operating revenue. CRED’s yearly loss in FY20 was INR 360.3 Crore, up 5.9 times from the $8 Mn it lost in FY19. The current cash burn is difficult to sustain, with an appalling EBITDA margin of -1979.5% in FY20, and the company will have to focus on its collections.

Despite registering astronomical losses it has attained a unicorn status by raising its valuation to $2.2 Bn in 2021. It is worth noting that the company is founded and led by Kunal Shah who is a known name in the start-up world for founding and leading numerous companies which may be an explanation behind the astronomical valuation of Cred. The graph below shows the valuation and losses of Cred over the years.

3. CarDekho — India’s leading car search venture

CarDekho helps users buy cars along with expert reviews, detailed specs, and prices, comparisons as well as videos and pictures of all car brands and models available in India. It has recently acquired an auto marketplace, Carmudi (Philippines) in late 2019 to expand business in Southeast Asia. GirnarSoft, the parent company of Jaipur-based automobile-related services behemoth CarDekho, has seen its losses increase by 155% to $45 Mn in FY2020. This comes after the company’s losses had already increased by 39% in the previous year.

Despite that CarDekho has managed to raise its valuation. Last year, Cars24, a CarDekho competitor, increased its consolidated revenue to $418 Mn and achieved unicorn valuation, and has a much lower EV/Revenue multiple. Let us now see the EV/Revenue Multiple of the peers in this game through the table below.

As per the last reported revenue and valuation figures.

We can infer from the table that CarDekho has a huge EV/Revenue multiple which signifies that the valuation of the firm is increasing at a much faster rate with respect to the revenue that the company generates, leading to overvaluation of the company. The graph below shows the valuation and revenue of CarDekho.

4. Unacademy

Unacademy is a Bangalore-based educational technology startup in India. Unacademy lessons are available in the form of Live Classes, which are both free and available on a subscription basis. Unacademy earned $12 Mn in revenue but spent $53 Mn, resulting in a loss of INR 300 crore. Employee benefits accounted for 23.7% of the edtech start-up’s costs, while other expenses accounted for 75%.

While 2020 brought plenty of development, the corporation would need to significantly increase its expenditures to reverse the losses it had in the fiscal year 2020, which ends on March 31, 2020. Unacademy’s revenue in FY21 is estimated to be over $55 Mn. It’s worth $3 Bn or approximately 35 times the expected income. The graph shows the valuation and loss of BharatPe.

5. BharatPe

When we talk about e-commerce giants, PayTm, Amazon, and Flipkart all wanted payments to take place within their own closed networks. BharatPe’s goal was to achieve what all the large brands were afraid to do: simplify things for retailers by adopting a standardized interoperable QR code. It allowed shops, street food vendors, and tea vendors to accept payments using any UPI app (PhonePe, Google Pay, PayTM, and so on) without having to download the apps. It was a simple and cost-effective approach with an added layer of security. The payment system’s complexity was reduced by a factor of ten by combining multiple UPI apps into a single sticker.

BharatPe was able to achieve early success by keeping things simple. BharatPe’s product strategy is based on making things simple for merchants, and the company uses P2M transactions as a springboard for future services. Because BharatPe does not charge merchants a setup or transaction fee, its fundamental feature money collection using QR codes is essentially a loss-maker for the company. It must spend a large amount of money to manage the servers that process millions of transactions every day. However, this provides BharatPe access to merchants who are passionate about their products and eagerly accept their offers. Despite having no visible revenue stream and without even earning a penny, the valuation of the company is increasing, and currently, it stands at $900 Mn, very close to the unicorn status. The graph shows the valuation and revenue of BharatPe.

The apprehensive loop of growing valuations

The indications are all too familiar. With large markets, illustrious founders, rapid growth, and top early-stage VCs on your side, you have a good chance of raising the next big round, even if you don’t yet have unicorn status (the desired billion-dollar value). And when major acquisitions are made for unproven companies, and valuations double or triple in a matter of months, it begs the question: are we in a bubble? This is always a challenge because most people only realize they were in an economic bubble after it has burst in the past.

Rich valuation multiples have also spread from the typical suspects — consumer internet companies — to enterprise software providers. This is a first. SoftBank, for example, invested in Mindtickle last year, valuing it at $500 Mn based on estimated revenue of $20 Mn — $25 Mn. Even SaaS companies in the United States, including Slack, Zoom, Snowflake, and Cloudflare, have gone public in recent years with great success. Sentiment in India often comes straight from the United States, particularly in related industries and from funds that invest in both nations, including several of India’s leading venture capital firms. Startup valuations are also affected by how publicly traded firms trade if retail investors are ready to pay high prices for loss-making companies, whether banks financing a share issue can find enough at a given price, and so on. There isn’t a single bubble across the board. Because of the vast quantity of money available in the market, investors are willing to pay a premium for good business. But that should be done judiciously.

Investors beware

For the first time in years, it’s possible to claim that private markets are more logical than public markets. If stock markets are the yardstick, select pricey companies may not be overvalued. A closer examination of what constitutes a bubble, as well as what Indian entrepreneurs are doing, reveals a more complete picture. Growth investing has been positive in industries that have recovered quickly from the epidemic, and there has been a lot of interest in a few market leaders. At such levels, one would expect some amount of rationalization. Investors must evaluate the prospects and the future road map of a company before investing. As more investments flow into a company without a proper business model or less revenue, it results in overvaluation creating a bubble. Investors can lose a colossal sum by not choosing the right company.

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This article has been co-authored by Sayan Mitra and  , who is in the Research and Insights team of Torre Capital.

Startup investing 101: The HNI’s guide to investments beyond the conventional asset class

by Sandeep Kumar

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Why invest in startups?

Investing in a startup is a high-risk, high reward game

Deciding the right opportunity and best practices for investing in a startup

Ways to invest in startups

Delaying the IPO comes with certain advantages for Startups

How startup investing really works

When can you expect a return or are you locked in forever?

Source: Pitchbook and CBInsights

Exits are what investors care about, but many founders dream of becoming a unicorn and avoid using the word “exit” until it’s too late. Despite this, M&As accounted for 97% of departures in 2020. And the majority of them occurred prior to Series B.

Exit or no exit: A fatal call

DiDi Chuxing IPO: The race to dominate the global ride-hailing pool besides stiff competition

by Sandeep Kumar

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DiDi Chuxing is a Chinese ride-hailing company headquartered in Beijing that was founded in 2012 by Cheng Wei. DiDi is China’s largest ride-hailing provider, with nearly 600 Mn riders and tens of millions of drivers. Didi Chuxing has the advantage of being a domestic player who is familiar with China and its clients. In China, the company’s app allows users to request trips from automobiles and taxis, as well as chauffeur services, minibusses, and ride-sharing services. If the IPO is successful, the company’s valuation could range between $70 Bn and $100 Bn. DiDi Chuxing, which is backed by SoftBank, plans to raise $1.5 Bn in debt financing through a revolving loan facility prior to its IPO. At a time when the Chinese government is cracking down on technology companies, Uber’s Chinese counterpart DiDi Chuxing may have filed for an IPO under the radar. Goldman Sachs and Morgan Stanley have been chosen to lead the company’s initial public offering (IPO).

Snapshot

  • Headquarters: Beijing, China
  • Founded: 2012
  • Notable Investors: SoftBank, Alibaba Capital Partners, and Ant Group.
  • Capital Raised: $24.9 Bn
  • Latest Valuation: $62 Bn
  • Exchange: NYSE
  • Ticker Symbol: DIDI
  • Founder: Cheng Wei

Cementing the position with its industry-leading services

DiDi-Chuxing allocates calls from customers within 3 kilometers, though this boundary is being widened now. However, DiDi-Chuxing recently added a destination basic allocation system in which DiDi drivers can announce a destination and escaping location. The DiDi-Chuxing allocating systems have two modes: selection mode, which began in July 2018, allows the DiDi driver to choose the destination, including long-distance; and allocation mode, which allocates calls to DiDi drivers nearby.

DiDi-Chuxing usually assigns DiDi-X to veterans and DiDi-pool to new drivers. Customers of DiDi use payment methods such as Wechat-Pay, AliPay, DiDi-Pay, and others. When paying for any DiDi-Chuxing usage, DiDi customers can change their payment methods. When a customer sends a DiDi-Chuxing car-sharing fee, the fee is transferred from the customer to DiDi. If the customer did not pay, he must pay the fee before using DiDi-Chuxing again. In the case of long-distance driving in Beijing, the DiDi system raises the fee by up to 30% to compensate the DiDi driver for financial loss.

In the case of DiDi-Premier, there are discrepancies between the announced payment amount in advance and the actual payment amount after driving. These two amounts, however, differed by only a few cents. Even though the customer’s money is directly allocated to the driver’s bank account, the money may be paid a little late after driving. Actual payment takes place two days after the customer’s payment, or one-time weekly payment is made.

Currently, DiDi-Premier is charged a distance fee, a low-speed fee, and a long-distance fee. DiDi-Luxury also receives a long-distance basic fee and a fast call allocation fee. Because of weak government regulations and medium-level public transportation conditions, DiDi-Chuxing has a 3 km base call allocation system, with a trend toward increasing the allocation distance from more than 3 km up to 10 km in the case of DiDi-Luxury.

Ride-Hailing App’s concentrated Revenue Model

The majority of the company’s revenue comes from its private ride-hailing app. DiDi-X drivers received 80% of the revenue paid to DiDi-Chuxing by the customer. DiDi drivers can drive the DiDi car for 12 hours per day, which is calculated based on the DiDi operating time.

DiDi-Premier drivers earn 74% of the revenue. DiDi-Premier fees are 20% higher than DiDi-X fees, and DiDi-Premier drivers earn 20% more than DiDi-X drivers. DiDi-Luxury is five times more expensive than DiDi-X and three times more expensive than DiDi-Premier. DiDi-Chuxing pays DiDi-owned luxury car drivers 10,000 yuan per month in one-time and weekly payments. The fee for DiDi-Pool is 10% less than the fee for DiDi-X. If customers pay with Alipay, Alipay provides a small incentive to the drivers as part of an Alipay promotion in DiDi-Chuxing. If a DiDi driver cancels the allocation more than four times, the driver must pay DiDi-Chuxing a fee.

What is important is that the revenue of DiDi drivers is more than twice the minimum salary of university-graduated manpower under the weakness of China’s taxi industry and the automotive industry with the support of the Chinese government with limited regulatory power. The Chinese government regards DiDi-Chuxing as a kind of revenue-increasing engine for the people.

DiDi’s Business Timeline

 

A dominant strategic player in the Chinese Market with uncertain longevity

DiDi Chuxing has risen to the top of the online car-hailing market after merging with and acquiring Uber China. After driving Uber out of China in 2016, DiDi Chuxing quickly dominated the country’s massive ride-sharing market – but its position is far from secure, as more powerful rivals emerge to challenge its dominance. According to PwC, China’s shared travel market will reach $564 Bn by 2030, with a 32% annual growth rate. Many businesses have been drawn in by the massive shared travel dividend. China’s online car-hailing market exhibits a high level of market competition. Many players are still active, in addition to the dominant DiDi Chuxing. There is still room for a taxi-hailing market worth $100 Bn. The national average ride-hailing success rate is around 75%, and 25% of online ride-hailing demand remains unmet. This provides a lot of incentive for new entrants like Gaode Taxi, Meituan Taxi, Ruqi Travel, and other public online ride-hailing platforms.

DiDi Chuxing has approximately 554.7 Million orders, while the order volume of more than ten travel platforms such as T3 Travel, Cao Cao Travel, Wanshun Car-hailing, Xiangdao Travel, and Meituan Travel is less than 90 Mn, according to the calculation of the internal parameters of online car-hailing. As can be seen, DiDi Chuxing’s order volume far outnumbers that of other ride-hailing platforms. DiDi Chuxing, on the other hand, cannot sit back and relax. The company’s continued loss of market share has also planted a slew of hidden dangers for it. DiDi Chuxing’s market share accounted for 95% of the scale of online ride-hailing around 2016. Later, due to security incidents, DiDi Chuxing’s ride-hailing business was forced to go offline in the second half of 2018, and its market share also fell to 90%; according to calculations, DiDi Chuxing’s market share is only about 85% today.

How does DiDi fair over different regions and their market leaders?

 Source: PitchBook 

 Chinese Ride-Sharing Giant on the way to profitability 

DiDi Chuxing is dubbed “China’s Uber,” yet it really outperforms Uber and other competitors in the Chinese market. DiDi Chuxing, or DiDi, is a Chinese ride-hailing startup that has amassed over 550 Mn users and 31 Mn drivers since its launch nine years ago. DiDi claims to have a 99% market share in China’s taxi-hailing business and an 87% market share in private auto hailing, according to its own data. In comparison to Uber China’s 45 cities, it has a presence in over 400 cities across the country.

The company’s primary ride-hailing business is lucrative, and it has rebounded since the coronavirus outbreak in China, its home market. The corporation has 14 international markets, including Australia, Japan, Latin America, and Mexico, in addition to China. The business is more than just automobiles and cabs. DiDi also includes bus services and a chauffeur booking option, which might be beneficial if you’ve had too much to drink and need a designated driver to take both the car and the driver home.

DiDi’s financial performance is difficult to quantify because it is a privately held firm. In 2018, Chinese news outlets claimed losses of $1.6 Bn. While its primary ride-hailing company charged an average of 19% in commissions, overall expenses, which included tax payments and driver bonuses, were 21%, implying a 2% loss each journey. This pattern may be traced all the way back to the beginning.

Concerns Regarding the company

  • Massive expansion and competitive pressure: DiDi’s rapid expansion in China was fuelled by its fierce competition with Uber and lax government rules regarding ride-hailing services. DiDi created an army of drivers, which it bolstered with massive driver subsidies, allowing it to outrun Uber’s operations.
  • Regulation which limits driver’s work regions: China, unlike the United States, has rules that limit where residents can work. DiDi drivers from rural areas, in particular, are not allowed to work in larger cities unless they live there. Residency licenses come in a variety of levels, and cities vary in how aggressively they enforce them. However, many are tightening their belts. Many large cities are experiencing a driver shortage as a result of this, as many drivers do not want to risk paying fines for working where they do not live. It has also compelled DiDi to delete a large number of its drivers from its own app.
  • DiDi’s predicament is hardly exceptional: Regardless of size, all ride-sharing companies must choose between responsible expansion and safety. The murders that were reported exposed significant flaws in the DiDi app and its protocols. One major flaw was the company’s decision to outsource its passenger assistance system, which was chastised for failing to act on a previous complaint against one of the alleged murderers. Keeping an in-house customer support team would definitely strengthen the entire safety system, but it is a step that would have a negative influence on the company’s bottom line, which is already far from profitable.

Valuation analysis of the company

 Source: PitchBook 

Market sentiments surrounding the IPO

DiDi Chuxing is planning an initial public offering, with a capitalization of $60 Bn. Although no official date has been set, the company anticipates going public in the first half of 2021. When it comes to ride-hailing, you may only be familiar with Uber Technologies Inc. and Lyft Inc. DiDi, on the other hand, is one of the most well-known ride-hailing companies in the world. Even yet, the recent failures of ride-hailing IPOs are worth noting. Following their IPOs, both Uber and Lyft saw their stock prices plummet, trading as low as 70% below their IPO prices. DiDi, on the other hand, may have something the other businesses don’t.

DiDi has a 17.5% ownership in Uber, and DiDi has invested $1 Bn in Uber, so DiDi is essentially the Chinese Uber. But there’s a lot more to it. DiDi joined Kuaidi in 2015 to build a smartphone-based transportation services behemoth. Taxis, privately owned cars, carpooling, and buses would be summoned by users. This is in stark contrast to the Uber and Lyft models, which rely solely on scooters.

According to the sources, DiDi Chuxing chose New York because of a more predictable listing pace, the existence of comparable peers such as Uber Technologies Inc. and Lyft Inc., and a larger capital pool. The decision comes as the US Securities and Exchange Commission pushes forward with a plan to delist international companies from US stock exchanges if they fail to meet US auditing criteria.

But even if DiDi was restricted to China alone, there would still be a case for the company. It serves a nation of 2 Billion people and has plenty of institutional backing. Tech investment giant and Uber-backer SoftBank Group Corp backs DiDi. Alibaba Group Holding Ltd. and Tencent Holdings ADR also back the company. Before its IPO, DiDi still expects to have another funding round to boost the valuation. Some of its shares are still trading below its 2017 peak valuation of $56 Bn.

Extensive product expansion and the road ahead

DiDi Chuxing, a Chinese app-based ride-hailing business, has unveiled a new three-year strategy for steady and sustainable growth. DiDi’s three-year plan, dubbed “0188,” moves away from its “all-in-safety” approach and toward longer-term safety capacity building and user value creation. The number 0 represents safety as a top concern, while the other three numbers represent DiDi’s strategy aims.

As of the beginning of 2020, DiDi has completed over 1 Bn international journeys. DiDi prioritizes its platform for integrated four-wheeler (ride-hailing, taxi, designated driving, and hitch) and two-wheeler (bike and e-bike) and public transportation solutions, as well as it’s subsidiary Xiaoju Automobile Solutions, autonomous driving, fintech services, and smart transportation businesses.

A customer-centric car leasing business has been unveiled by DiDi and its long-time partner BAIC, as well as a consortium of automotive industry enterprises and Chinese state-owned institutions. “In the next three years, the companies hope to have a fleet of 100,000 cars available for lease,” according to the agreement.

Should you invest?

The majority of initial public offerings (IPOs) are volatile at first. You have a large influx of early investors who buy into the hoopla and then fade away. As a result, many IPOs experience a drop in the period following the IPO. We’ve already listed Uber and Lyft, but we can think of a few more. JFrog Ltd. (NASDAQ: FROG) has dropped 33% since its first public offering in October. Snowflake Inc. (NYSE: SNOW), the largest software IPO in history, dropped 40% after rising 61% in the months afterward. This is how most initial public offerings (IPOs) go, which is why we constantly advise against investing in them immediately. You might want to get in as quickly as possible in some circumstances. But, in most cases, it’s better to wait for the euphoria to settle down and see whether the stock can return to a stable state i.e. the actual value. You should also be wary of the company’s particular industry.

It’s difficult to be positive about a ride-hailing service, using Uber and Lyft as examples. But, as we already stated, DiDi’s case may be different. As both Uber and Lyft have been embroiled in a price war across the United States, which has caused their stock prices to plummet.

DiDi has the advantage of having China almost entirely to themselves, as well as having infiltrated overseas markets. A user base seven times that of what many consider the industry’s biggest brand (Uber) might have a significant impact on DiDi’s stock performance following its IPO. As a result, the stock is more likely to be a buy than Uber or Lyft. However, because Uber is a shareholder, DiDi’s success might put money in Uber’s pocket, giving Uber an even bigger advantage in its struggle with Lyft. If you want to purchase Didi stock, it is advisable to get it at the right price

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This article has been co-authored by Sayan Mitra and Yogesh Lakhotia, who is in the Research and Insights team of Torre Capital.

Asset allocation for new age investing: The key to reaching a higher financial altitude

by Sandeep Kumar

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Perhaps you keep telling yourself that you’ll invest when you have more money or that you’ll do it “someday.” Or perhaps you’re concerned that the markets are now fragile, so you’re sitting on the side-lines, waiting for a “better time” to invest. Alternatively, you may believe that you must become a hard-core specialist before you can accomplish anything with your money that approaches investing.

But here’s the thing: delaying it may cost you more than you realise. Experts estimate that 40% of people have lost money due to procrastination. If you wait to invest, you may miss out on some extremely significant financial advantages. In the long term, the sooner you put your money to work, the better off you’ll be.

Long-term economic growth forecasts are crucial for global investors. Equity prices are based on forecasts of future earnings, which are in turn based on forecasts of future economic activity. This dynamic implies that the same variables that drive economic growth will also boost equity values in the long run. Similarly, the predicted long-run real income growth rate is a crucial predictor of the economy’s average real interest rate level, and thus the level of real returns in general. The link between actual and prospective growth (i.e., the degree of slack in the economy) is a fundamental driver of fixed-income returns in the short run.

Asset Allocation: An inevitable step for successful investments

The asset allocation that is appropriate for you at any particular stage in your life is mostly determined by your time horizon and risk tolerance.

  • Risk ToleranceRisk tolerance refers to your readiness to risk losing some or all of your initial investment in exchange for higher prospective returns. An aggressive investor, or one who is willing to take on a high level of risk, is more inclined to risk losing money in order to achieve greater outcomes. A cautious investor, or one who has a limited risk tolerance, prefers investments that will allow him or her to keep their original investment. Conservative investors preserve a “bird in the hand,” while adventurous investors pursue “two in the bush,” as the classic phrase goes.
  • Time Horizon – Your time horizon refers to how many months, years, or decades you intend to invest to reach a specific financial goal. Because he or she can wait out slow economic cycles and the inevitable ups and downs of our markets, an investor with a longer time horizon may feel more comfortable taking on a riskier, or more volatile, investment. Because he or she has a shorter time horizon, an investor saving for a teenager’s college education will likely take on less risk.

Letting go of traditional investments

Traditional investments like FDs already have seen starving interest rates. It will not be unrealistic to assume that soon there will be a time when instead of the bank paying interest on FDs the investors will have to pay the bank to keep their FD being in negative interest rates. Similarly, Mutual funds in maximum cases fail to give a hefty return, the way it is presumed. If we talk about stocks majority of the investors tend to lose money as the act of investing in stocks, bonds, etc. is driven by human psychology and not by numbers. Often investors tend to ignore macroeconomic factors like GDP, Unemployment, etc. We profoundly find investors to have an attitude of going with the flow resulting in over-valuation of a stock and at the end when the bubble bursts there are only tears.

Let’s say if you did run the numbers very carefully but the hardest fact to digest is that the stock market prices don’t only depend on the company’s performance. As we have discussed a number of times that macroeconomic factors are not in the control of any individual investor.  Let us take a glance at the returns that the traditional asset classes have generated through a graph.

Traditional investments were the investors’ favourite since they appeared to provide security and comfort. However, they have a significant and generally noticed secondary effect: a tiny increase in wealth. The rate at which prices rise is referred to as inflation. According to the most recent estimates, India’s inflation rate is around 5% – 6%. This indicates that money loses 5% – 6% of its worth each year. After accounting for inflation, a 4.5% after-tax return on traditional assets will result in negative real returns.The falling interest regime that on for the last few years, drove quite a few of these investors towards Mutual Funds which still fails to provide an optimum return for investors.Following the recent market downturns, interest rate reduction, and the resulting impact on fixed deposit rates, many investors are now questioning if traditional investments are still a smart investment option.

Alternative asset classes for investments an opportunistic future

Alternative assets are less traditional and more unexpected investment options. Alternative asset classes include commodities, real estate, NFT (Digital Art), venture capital, private equity.

  1. Alternative Investments
  • Venture Funds: It is money put into start-ups and small enterprises that have the potential to grow over time. It is a high-risk, high-reward investment that is often made by relatively wealthy people. Even more intriguing is the fact that most traditional venture capital funds are limited partnerships. This means that the money can only be invested once by the fund managers. They must refund the principle and gains to the venture capital fund’s investors if they make an investment and leave for a 3 to 4x return.
  • Private Equity Funds: It is made up of investments made privately and not publicly traded. These investments are made directly into private enterprises by investors. Typically, this funding is raised to fund innovative technology or acquisitions. Success in the private equity markets necessitates a high level of risk tolerance and the capacity to deal with significant illiquidity.
  • Unicorns: Unicorns were formerly depicted by ancient Greeks and Romans as being very quick and light on their hooves, with a horn treasured by merchants and investors. It’s a description that may also be used to today’s unicorn businesses. Investing in unicorns makes sense given low interest rates, continuous technological advancements, and new regulatory benefits. However, there is a contradiction to investing in unicorns: the availability of private equity makes them less likely to go public, yet their aversion to public markets makes their shares difficult to come by.

We have the expertise you need and the service that you deserve at Torre Capital, a VC-funded Singapore-based Financial Technology company. We are creating a fully digital Wealthtech to connect family offices and HNI investors with global opportunities, including alternative assets like Private Equity, Venture Capital, Real Estate Funds, and Hedge Funds.The table below consists of some of the PE/VC Funds with their IRR and Fund size.

  1. Real Estate

Commercial and residential properties, as well as REITs, are all examples of real estate. Real estate consists of land and anything permanently attached to it. REITs, or real estate investment trusts, are businesses that own and operate income-producing real properties. REITs provide investors with the chance to invest in real estate as a kind of financial stability. Transacting in REITs is substantially less expensive and time-consuming than transacting on properties. REITs make a lot more sense as an investing vehicle. Second, it provides investors with a new asset class outside of traditional stock, debt, cash, and gold, so helping to diversify risk. The returns generated by REITs are depicted in the graph below.

Collectibles / NFTs

NFTs are digital works of art that exist on the blockchain network and can take a variety of forms. Memes, video clips, images, music, and even tweets are some of the most popular forms of digital art. When you buy these tokens, just like any other investment, there’s always the possibility of your money growing in value. These digital treasures are non-fungible, which means they can’t be replaced. At the moment, blockchain technology is generating a lot of buzz. Some predict the technology will have the same impact on consumer behaviour as the Internet did. Now let us come to the prime question that is how much to invest in NFTs?

Honestly answering these NFTs (especially Digital Art) revolves around the concept that beauty lies in the eyes of the beholder. Hence when you buy something unique and the other person sees the same value in it and the demand increases the prices also shoot up. It will be wise to say that an investor can always explore this option with extra wealth.

 

  1. Cryptocurrencies

In the last five years (ending 31 December 2020), the S&P 500 index of large-cap US equities has compounded at an annualized growth rate of 14.5% (in USD, net dividends reinvested); over the same time period, the price of bitcoin in USD has compounded at an annualized growth rate of 131.5%. Now if we consider Etherium it also has given a hefty return of 500% in 1 Year. If this still feels normal, then let’s talk about some astronomical figures like in the case of Dogecoin or Meme coin as it was named earlier has given a return of around 20000% in a year.

Apologies if you felt a minor heart attack after seeing these return figures.

It is also very important to note that the market is highly volatile and very unprecedented due to a lack of regulation. We are not unaware of the current scenario of Bitcoin and the way Elon Musk is affecting the market sentiments and indirectly controlling the prices, even the astronomical values that Dogecoin gave was also due to the SNL tweet by Elon Musk. You might still be wondering if you should invest in cryptocurrency or not!If we consider simple lottery tickets where nearly 1 lac people buy the tickets and the probability of winning the competition is 1/100000. Now If I ask you do you put all your savings to buy lottery tickets? The obvious answer is No. The reason it is has no backing and the uncertainty is infinite. We just intend to justify the psychology behind the investment by bringing in the example of a lottery. You should invest your money in crypto according to your risk appetite. The graph below shows the returns generated by Bitcoin and Ethereum.

  1. Digital Gold

Buying physical gold certainly has its downsides. There are issues of identifying its legitimacy and purity, then there are problems of safekeeping and storage. One more issue is that we are in the midst of a pandemic. It is not quite ideal to go out to gold dealers or jewellery stores. Digital gold, on the other hand, can be bought online and is stored in insured vaults by the seller on behalf of the customer. All you require is Internet/mobile banking and you can invest in gold digitally anytime, anywhere. You can take physical delivery of the gold at your doorstep. You can invest an amount as low as Re.1. Digital Gold can be used as collateral for online loans. Digital Gold is genuine and the purity is 24K, 99.5% for SafeGold and 999.9 in the case of MMTC PAMP purchases.

Your purchase is stored safely and is also 100% insured. You can exchange digital gold for physical jewellery or gold coins and bullion.Trading volumes of digital gold in India totalled four to five tonnes last year in India and have proved to be a new way of investing in gold. Let us take a glance at the returns that the gold market has generated through a graph.

The magic wand of diversification to minimize risk

Diversification is the process of dispersing money among several investments in order to lessen risk. You may be able to limit your losses and lessen investment return variations by selecting the correct set of investments without losing too much potential gain.

Furthermore, asset allocation is critical since it has a significant impact on whether you will reach your financial objectives. Your investments may not produce a significant enough return to fulfil your goal if you don’t include enough risk in your portfolio. For example, most financial experts believe that if you’re saving for a long-term goal like retirement or college, you’ll need to incorporate at least some stock or stock mutual funds in your portfolio. However, if you take on too much risk in your portfolio, the money you need to achieve your goal may not be available when you need it. For a short-term aim, such as saving for a family’s summer vacation, a portfolio strongly weighted in stocks or stock mutual funds would be improper. You may feel comfortable building your asset allocation model if you know your time horizon and risk tolerance, as well as if you have some investment expertise.

The art of rebalancing

Rebalancing is the process of returning your portfolio to its original asset allocation balance. This is crucial since some of your investments may drift away from your investment objectives over time. Some of your investments will increase at a higher rate than others. Rebalancing your portfolio ensures that one or more asset categories are not overemphasised, and it returns your portfolio to a reasonable level of risk. Let’s say you’ve determined that alternative investments account for 70% of your portfolio. Alternative investments, on the other hand, now account for 90% of your portfolio, thanks to a recent spike in returns. To re-establish your original asset allocation mix, you’ll need to sell some of your stock assets or buy investments from an under-weighted asset category.

Your portfolio can be rebalanced based on the calendar or your investments. Investors should rebalance their portfolios on a regular basis, such as every six or twelve months, according to several financial gurus. The advantage of this strategy is that it uses a calendar to notify you when it’s time to rebalance.

Others advise rebalancing only when an asset class’s relative weight grows or lowers by more than a particular percentage that you’ve determined ahead of time. The benefit of this approach is that your investments will alert you when it’s time to rebalance. Rebalancing, in either instance, works best when done on a somewhat occasional basis.

Never put all your eggs in one basket

Many people are hesitant to invest because they are afraid of losing money. A novice investor’s first question is frequently, “What if I lose everything?” While all investing has some risk, the fear of losing “everything” is unfounded if you choose wisely where to invest your “eggs.” A well-diversified portfolio should have two degrees of diversification: between asset categories and within asset categories. You’ll need to spread out your assets within each asset group, in addition to arranging your investments across stocks, bonds, cash equivalents, and maybe additional asset categories. Naturally, when you add more investments to your portfolio, you’ll incur higher fees and expenses, lowering your investment returns. As a result, while considering how to diversify your portfolio, you’ll need to factor in these fees.The idea is to find investments in parts of each asset class that may perform differently depending on market conditions. So Happy Investing!

– – – – –

This article has been co-authored by Sayan Mitra and Ayush Dugar, who is in the Research and Insights team of Torre Capital.

The Fault in our Doge

by Sandeep Kumar

Keep up to date with the latest research

– And why it won’t go to the stars; or the moon; or practically anywhere for its sake

Among the deluge of cryptocurrencies popping up every day, Dogecoin has had the most gala ride in the past few months. The cryptocurrency, which features the ‘Shiba Inus’ dog as its mascot, gained its market cap from $1 Bn in early January to $80 Bn in May. January and May, of the same year! That is insane!

So a basic primer first for all those who don’t know what Dogecoin is.

Dogecoin: Something that started as just a meme.

Dogecoin is basically like Bitcoin (it actually is a fork of Litecoin, which is heavily adopted from Bitcoin) and like most cryptocurrencies, it enables peer-to-peer transactions on a decentralized network. The difference between the two? Bitcoin was a revolutionary technology, the original proof of work concept, based on a blockchain. Many called it the ‘disruptor of the internet’, some considered it a challenge to the global financial system, yet others considered it to be a shift of power from evil global forces to the next-door Joe and6 Jane. Bitcoin was the money of the future.

Dogecoin is just dogecoin, a digital coin, with the picture of a dog on it!

The Dogecoin has been around for much much longer than most think. It was started in 2013 by two engineers, Billy Markus from IBM and Jackson Palmer from Adobe. In their meeting they decided to combine the two phenomena that had taken the world by storm: Bitcoin and Doge, and out came the Dogecoin. Because this is what the guys do when they meet, they build random, open-source, meme-based, cryptocurrency.

The Initial Claim to Fame

The idea was to make an alternative to Bitcoin due to the massive profiteers that had gotten into mining it. Bitcoin, launched in 2008, had failed to achieve what it set out to venture. Dogecoin was expected to change that.

How?

Well, Bitcoin was limited in number, only around 21 million of those can be mined ever. Dogecoin, on the other hand, 10,000 of them can be mined every minute.

The Dogecoin was a hit amongst the crypto geeks. It was mostly used to tip online content creators due to the high speed of transactions, nominal denominations, and low cost of transaction compared to other cryptos like Bitcoin. It was dubbed as a ‘tipcoin’. It is claimed that the trading volume even surpassed the heavyweight Bitcoin for a brief period. In 2017, it crossed the $2 Bn market cap figure, after raising 50,000, USD for a Jamaican bobsled team, raising 30,000, USD for clean water in Kenya, and sponsoring a Nascar. All of this before crashing.

The Dogecoin went unnoticed for years, the original subreddit that had catapulted it to fame silenced, the founders of the coin left, and the code wasn’t even updated.

It was in March 2020 when the Doge had its moment. Serial entrepreneur and influencer Elon Musk threw his support behind Dogecoin and the community, claiming it was ‘inevitable’ and could be ‘the currency at Mars’. He was joined by several others such as Carole Baskin, a big cat rights activist, singer Gene Simmons, bodybuilder Kai Greene, former adult star Mia Khalifa, American rap star Snoop Dogg, etc.

Even with all the love and support that Dogecoin has been getting, let us walk you through the potential faults that hinder its acceptance as a currency of any form.

Founder’s Exit

The Dogecoin is a meme coin, not meant to be taken seriously. Even its founders didn’t. So much so that they abandoned the project long ago. Today merely three part-time developers manage the codebase. This has led to absolutely no tech development taking place in the Dogecoin code base since 2015.

While some view this in the ‘do not take it seriously’ vein, a poorly maintained codebase makes the Dogecoin susceptible to be dislodged by more up-to-date and modern coins. The Dogecoin may be left behind and simply replaced by some other memecoin that catches people’s fancy.

Cyber Attacks, Security Breaches, and Frauds

Due to very little codebase maintenance, Dogecoin has been hacked previously. The Doge Vault was infiltrated and close to 280 million Dogecoin, worth $55k then ($196 Mn today) were stolen along with the credit card information of hundreds of users. While the community almost immediately pooled resources to recover the stolen Doge under the banner, the official statement read this:

“It is believed the attacker gained access to the node on which Doge Vault’s virtual machines were stored, providing them with full access to our systems. It is likely our database was also exposed containing user account information; passwords were stored using a strong one-way hashing algorithm. All private keys for addresses are presumed compromised; please do not transfer any funds to Doge Vault addresses.

If you like to use Dogecoin, you should change your online account passwords and make sure to check your credit card statements frequently for fraudulent or unauthorized purchases. But let’s be serious here; we kind of hope you aren’t investing serious capital into this pseudo-currency. (emphasis added)

That is the official statement.

In 2014 a crypto exchange called Moolah was set up in the UK to handle Dogecoin by Alex Green. Many new doge holders jumped the wagon, while Green continued using the ‘tipcoin’ to make hefty tips. He even sold shares of the exchange as Dogecoins. It wasn’t long before Moolah was shut down, and Green disappeared with the money, who was later found to be Ryan Kennedy, a serial scammer, and rapist.

And not just dogecoin, but even with other cryptocurrencies, several unregulated exchanges spring up one day and take off the next, leaving investors high and dry.

Pump and Dump

Cryptocurrencies aren’t really of any use except mindless trading. The volumes are meager and regulators are absent. This makes them a ripe target for pump and dumps by pumping rings which have existed since the very inception of cryptos.

When the Reddit user /r/wallstreetbets successfully managed to pump the Gamestop stock, the crypto pump rings saw this as the moment that they had been waiting for for years. They saw a gullible audience, that didn’t really know what it was doing, to follow them thinking that they would make a blow against the big guys and have fun doing so.

Needless to say, most stories ended on a bitter note, with several of these gullible traders buying at the peaks when the pump rings sold.

This is what took place on January 28, when a Reddit user decided Dogecoin be the next asset to pump. He was joined by Elon Musk, an obsessive Twitter user. The price of the Dogecoin rocketed up and crashed the next day.

Not just the Dogecoin, but several other cryptocurrencies, all are susceptible to such hostile market manipulation.

Too Volatile to be a global currency

All cryptocurrencies have seen massive volatility. In the image below, bitcoin and ETH are found to be more volatile than the S&P 500 itself. Even as the S&P volatility dies down, the crypto volatility keeps rising.

These are not the characteristics of a stable, fiat currency. What is expected of the currency is to hold its purchasing power stable even over long periods of time, not jump up or down 10% by the time one goes from home to the grocery store.

Poor Hedge Against Inflation

As 0% interest rates or even negative interest rates seem a possibility, bitcoin, among others, is touted as a hedge against inflation. Limited supply cryptos like Bitcoin are positioned as a hedge against this inflationary scenario. Why? Because of its 21 million limits, Bitcoin’s demand vs supply is expected to cause an increase in price as supply decreases.

Even the short history of Bitcoin is not enough to cement its position as a hedge against inflation. Gold on the other hand has had millennia of history of tracking inflation and yet it was susceptible to shocks, manias, and crashes over the shorter term. Bitcoin is no different.

Even in the recent weeks as concerns of inflation pushed the 10 year US treasury yield from 1.34% to 1.62%, bitcoin suffered its worst drop in months. Unlike other inflation hedges, cryptocurrencies’ value is based entirely on other people’s willingness to hold on to it, not on some underlying asset like oil or real estate.

It is fully possible that increasing inflation may lead to an overall recession. The real test of cryptocurrencies will be when investors pull their money from riskier assets like bitcoin or pour more into it.

The infinite supply of Dogecoins

While a few cryptocurrencies do have at least the “limited number” argument in their favor, Dogecoin does not even have that. 10,000 dogecoins can be printed every minute. This rather infinite supply of the dogecoin makes it very hard for it to gain in value.

However, in spite of this structural anomaly in Dogecoin, the prices have soared considerably over the past months.

 

So much for being Decentralised

According to a Wall Street Journal report, the largest holder of Dogecoin owns 28% of the currency! The position is worth at least $2.5 Bn today! The top 10 largest addresses combined hold 43% of the total Dogecoin supply. The idea behind Dogecoin being decentralized simply bites the dust when just 10 wallet holders own 43% of the currency. One major sell-off and the prices crash.

Will the party continue for Dogecoin?

Bears believe that the bubble could burst anytime soon. A game that has a definitive end in the near future. On the other hand, some enthusiasts feel the recent crash is just a minor setback. They still think that it has the potential to grow further in the future.

Can Dogecoin place itself as a reliable money system not limited to any particular state and government? Or will the influencers of crypto just have fun with it for a while and then forget about it for another eternity? Or will Dogecoin ever reach the $1 mark? Probably, Probably Not!

So the final question – whether to invest in this joke or not? Well, be clear about your investment goals first. It’s always a good idea to have a diverse set of investments for your portfolio which are harmless to your risk appetite. So ask yourself this – why do you want to invest in Dogecoin? To make instant money or a fortune that you see forthcoming?

Or maybe launch a crypto coin of your own. That is the sure-shot way to make some quick bucks.

                                                                   – – – – –

This article has been co-authored by Khubaib Abdullah and Yogesh Lakhotia, who are in the Research and Insights team of Torre Capital. 

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