Why Elon Musk’s hold on $44 billion Twitter deal is an eye opener for investors

Checking fake users and fake engagement should be part of the standard due diligence during the valuation process to set realistic numbers. In India startups are likely to lose close to Rs 1,000 crore to bots and other fraudulent agents from the digital marketing spends they are likely to make in 2022.

Why Elon Musk’s hold on $44 billion Twitter deal is an eye opener for investors
As per a report by Orios Venture Partners, startups in India raised $42 billion in 2021, which was 3.7 times more than $11.5 billion raised in 2020.

By Amit Relan 

“What are you going to do with the money if we give you the investment you are seeking?” This is the basic yet important question that every potential investor or investor group has in for a startup. The simple and straight answer to this is that money will fuel growth and expansion.

Investors love to be growth partners but for that, they need to understand how the growth will come.

This is where the performance track record is vital. The entrepreneurs seeking investment show up the performance in terms of users acquired, transactions they do, the traffic they bring in, daily and monthly active users, GMV, and other key metrics. For achieving these numbers an organization has a mix of organic and inorganic endeavors under the ambit of digital marketing. They ‘burn’ money through third-party platforms or invest in-house in digital marketing teams to drive this growth. Typically, they do both.

mFilterIt has been over the past six years validating and auditing the ad spends of several key native digital brands. These brands have cumulatively spent over a billion-dollar over these years in achieving these metrics to drive business. For businesses, at whichever level of the digital horizon they are, spending digitally is no longer just getting signup, or a like or comment. It is about acquiring users who will drive revenue in one or the other way.

The average fraud rate in inorganic digital campaigns ranges from 6% to 35% depending on several factors. Some of them depend on the campaign type, the platform being used, partners being engaged, KPIs being pursued, and others. In a typical app user acquisition, the average fraud rate is 28% for India. Now, what does this mean?

Simply put, it means if $1 is being spent on acquiring users for an app, $.28 out of them does not yield any returns. Rather, they are spending on acquiring fake users which are mostly in the form of bots, though there are other techniques as well, where the user acquisition is jacked up in the form of real humans. However, they are never the target users and immediately go dormant after signing up.

For an investor, it is a double-edged sword. Firstly, it means the performance being reported is 75-80% of what appears on the papers, in today’s world of excel worksheets. This means, that if a startup seeking investment is claiming it has 1 million users, there is a very high probability it would have only 750-800k genuine and real human users. The same goes for all other parameters showcasing performance. Now, even if the investors play safe and do not exactly go by the performance reported and on their rough sheets define realistic measurements factoring some inefficiencies, it will only correct the achieved performance upon which investments are sought.

The other issue is about the utilization of the investment that has been made. Investors mostly keep an eye on the input-output equation. This means if they put in X dollars they check if that is resulting in the growth of a factor of X. This is not an ideal way to measure the performance and keep a track of the investments made by them. What is also equally important is the means through which the performance is being ‘achieved’.

The gestation horizons are shrinking. Other than long-haul infrastructure investments, investors are looking for instant gratifications and results. This is where the inorganic becomes inevitable. There is no harm in going inorganic. An ideal organization must go for both – organic and inorganic endeavors.

However, to meet the expectations of the investors, the organizations go for all types of techniques without much due diligence and regular monitoring. Resultantly, it means spurious user acquisition, poor engagement, and unsustainable business results.

The same ordeal happened to the Twitter deal proposed by Elon Musk – billionaire entrepreneur of the times! What appears to have happened is during the initial rounds of the check, the performance seemed to be phenomenal making him make an offer that surprised many. At $44 billion, it was 40% premium to the closing price of the day before he made the offer public. But as Musk started digging deep, basis the news reports and his own tweets, the fraud users and fraud engagement details crept in, and he started to question his offer.

As per a report by Orios Venture Partners, startups in India raised $42 billion in 2021, which was 3.7 times more than $11.5 billion raised in 2020. This investment goes in different buckets – technology, people, infrastructure, marketing, etc. Looking at the startup expenditure pattern, one can safely assume that 10% ($4.2 Bn) of this money will go in marketing and advertising.

With digital being the primary medium for modern-age startups, around 40% ($1.7 Bn /  Rs 8,200 crores) will go into digital marketing. Assuming the gross ad fraud and other inefficiencies rate of 12% on these spends, basis mFilterIt’s internal analysis of digital spending of past 6 years, $204 Mn / Rs 984 crores) will be lost to bots an d other fraudulent agents present in the digital landscape.

This is the investors’ money that has been poured into these startups instead of performance and results.

Elon Musk is one of the shrewdest investors apart from being a ‘blue-sky thinking’ entrepreneur. He perhaps got the pulse of the things just in time, which is mostly lost by even the best of the investors who have years of expertise and experience in investing in blue-chip and digital businesses. The hold on the Twitter deal is an awakening call for investors who need to mandatorily go for due diligence of the performance being reported as well as put in place real-time auditing and monitoring mechanisms to not let their investments go to bots.

The author is the CEO and co-founder, mFilterIt, a global anti ad-fraud and brand safety solutions company 

Read Also: Work That Speaks | Ad Reviews | 27 To 30 July 2022

Follow us on TwitterInstagramLinkedIn, Facebook

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.