MUMBAI, MARCH 20: A leading foreign bank was jilted no less than four times over the last couple of weeks by Internet companies with whom the bank had finalised deals and even signed term sheets. Unwilling to be named, a senior official at the bank says he is "exasperated with the way the rules of the game are suddenly changing with the unrealistic expectations on valuations by dot.coms".All the four Internet companies who reneged on contracts ostensibly did so because they were offered better valuations as soon as the deal with the bank in question was made public.
"This is a reality today" rues Ronil Sujan, director, mergers and acquisitions at Rabo Finance. " The scarcity factor is becoming quite obvious with a lot of VCs chasing very few quality dotcoms." What is possibly most indicative of this demand-supply gap is the fact that if a dot.com was valued at ``X'' in October 1999, a similar company with the same parameters in terms of hits, idea, content and revenue models is likely to be valued at, at least ``3X'' today, according to Rashesh Shah, CEO of Edelweiss Capital.
He also adds that, typically, a dot.com which went through it's first round of funding last year should be looking at valuations going up by about 3 to 5 times before it's second round of venture funding scheduled for early 2000-but "what we see today is that valuations for these companies have gone up by 8 or 9 times between the two rounds of funding." "Each venture fund is looking to make about three or four investments and there is undoubtedly a scramble among them to partner companies which are perceived as quality ones in the market today," says Shah. In addition to the investments made by VCs, there are also investments of the strategic kind where companies buy stakes in Internet ventures which offer them a strategic fit. Typically, media companies looking for strategic investments at this point are likely to hike valuations in their bid to acquire partners who make strategic sense, according to Sujan.
All said, however, while the scarcity factor may propel valuations to some extent, the perception of the Internet as the prime driving force for business in the future, by investors, cannot be discounted according to Shah. "We need to take a cue from the stock market perception of the Internet which is driving prices there," he adds. Shah expects the scarcity factor-which is driving valuations currently-to peter out in the next couple of months. But the general consensus is that valuations will continue to rise. "A lot of value has been created by Internet companies in China and Latin America and people here have taken cognisance of that. I expect valuations to go up further," says Raj Kondur of Chrysalis Capital. Hold on to your hats!
Copyright © 2000 Indian Express Newspapers (Bombay) Ltd.