Startup Mania
Line Managers acquiring startups
Free money not to be missed.
Innovation mania is gripping large companies. The fear of missing out (FOMO) is making companies do hilarious things. The most common is to empower line managers overseas to buy companies.
The line manager – when in a sales role – is trying to maximise discount to his customer. It makes sales easier. Now it is the reverse – he tries to get an approval to buy a startup at 10x of what the company is worth. Or he may pay a fortune to buy a complete dud. It is like sending your driver to buy artisanal cheese or sending your cook to buy the next company car.
These line managers have no clue on valuation, legal liability or technology assessment. Yet they seem empowered to write large cheques. Board run, professionally managed companies are most at risk. A dysfunctional board and line managers authorised to buy companies overseas is a complete recipe for disaster.
Everyone from the likes of Suzlon to Tata or from Birla to Reliance are buying innovation overseas. The ticket sizes are small – so internal scrutiny is low. After all what is usd 10m for a company with a usd 50 billion market cap. It is a rounding off error.
One CEO mentioned “at least I am trying. We can’t innovate internally. If we invest in ten, two will be winners”.
And this is where they are completely wrong. You throw ten darts in the air in all directions and there is close to zero probability that anything will hit bulls eye. 100% will go waste.
But that is not where the bad news ends.
The companies will buy liabilities in foreign lands which will have to be discharged by the parent company. You buy a semiconductor design company for usd 10m doesn’t mean your liability is limited to usd 10m. The parent company may have to shell out a billion dollars in future claims.
Tata for example have perfected the art of buying liabilities. Jaguar and Corus are going nowhere. Air India crash is going to result in more liabilities. These liabilities will not be limited to the cost of the plane that crashed or to the amount paid to buy Air India. The smaller the company, the more unknown the risk. Especially in pharma or civil construction.
The indian corporates don’t understand ring fencing. So they sometimes make the unforgivable mistake of owning these entities from their own balance sheet. And proudly putting their name on the company they have acquired. Placing the parent brand at a reputation risk.
This is a bubble waiting to burst.
It is not IF but WHEN it will blow.
But one man’s problem is another man’s feast. If you are a doctor, pandemic is good news. If you are a startup promoter stuck with a company going nowhere, this is your chance at a quick and profitable exit.
Family offices are way too smart. Getting a VC to buy a lemon – no chance. But if you can put lipstick on the pig – Indian board run corporates are your best bet.