It is interesting to see Tech Crunch article ( https://techcrunch.com/2019/11/24/paytm-1-billion/) that PayTM is raising a $1 billion in a new round funding. Tech Crunch article says that it has raised a total of $3.3 billion todate. I don’t have any details but reading between the lines, I see it has prioritized growth over profitability.

I am not able to get my arms around these things. I know for sure that capital flows are not steady and can change overnight. Let me relate the story of Exodus, a darling of dotcom era. Exodus was started by KB Chandrasekhar and BV Jagadeesh and pioneered Internet Data Center business and grew rapidly as Internet grew in late 90s. It was doubling every six months and reached $100 million a month revenue by 1999. It went public in 1998 and reached a public market valuation of $30 billion. 100% growth implied that it needed to double its capacity of data centeres every six months. Money was easily avialable as its banker Goldman Sachs would raise billioh dollar in convertible debentures overnight. Coventional wisdom was not to sell equity to dilute shareholders but to raise debt. I was on the only board that advised against doing so. I resigned from the board and decided to sell my shares.

The problem was that as company scaled, its losses also scaled. It never made profit and it had $3 billion dollar debt that needed to be serviced. It borrowed more to service the debt and build the data centers. When the music stopped with the dotcom bust in 2000, the money dried up. Its customers started to default and new data centers went empty. Company went from being worth $30 billion to nothing- I mean zilch, in no time at all.

My shares had grown 1000+fold and I was super rich on paper but I was not able to sell as I was locked up as an ex-insider for 90 days. I sold as much and as soon as I could but the value had dropped 90% when I was allowed to sell. By the time I was out, it had drpped another 90%.

I learnt the hard lesson that you can not count on financing when you most need it if you are not profitable. A profitable company can pull its horns in and ride out the market storms. Loss making ones go under.

We are coming back a full circle after this last cycle. Cash is a commodity was the mantra during dotcom cycle and we know where that got us. This cycle was all about the growth/land grab as plentyful cash was available very cheaply. Or so every body believed.

Cash is the mother’s milk for startup, cash is the lifeblood for startups. These were the common ditties in Silicon Valley when I was a young entrepreneur. Alan Shugart, founder of the Disk Drive industry (Shugart Associates and Seagate Techology) was an iconic Silicon Vlley entrepreneur. He was fond of saying that “cash is more important than your mother”. You can always apologize to your mother and expect to be forgiven but there is no forgiving when you run out of cash.

There has been an iron law of capitalism that can not be violated for very long. Capital seeks the investments where it gets the best returns on the risk adjusted basis. Unicorn phenomenon violated that law, so could not last long. It is surprizing that it did last as long as it did.

Only three companies survived the brushfire that burnt down the dotcom industry: ebay, Yahoo and Amazon. ebay and Yahoo were very profitable. Amazon had a great story to tell and was able to convince the hardnosed Wall Street to go along. We will see what happens this time around. I don’t expect any of the big investee companies of The Vision Fund to provide returns commensurate with the risk, that is if they survive at all.

I feel less disoriented now as I am back in the familiar territory.