Technology, Venture Capital, Private Equity

Perspectives from an Indian VC

Archive for September, 2007

A corporate finance conundrum

Posted by Arun Uday on September 24, 2007

Ok, so you think you are a finance pro. Then answer this valuation puzzle –
Suppose you are trying to value a firm. You do a DCF for the Free Cashflows to the Firm (FCFF), which means, you leave out any financing charges such as interest payments. So, at the end of the exercise you arrive at the Enterprise Value of the firm. How do you now handle the cash that the firm has on the balance sheet? Do you add it to your above computed value, subtract it or leave it alone? (For argument’s sake lets assume that the firm really has a lot of cash sitting on its balance sheet).

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Imminent slowdown – Blame the “YouTube effect”

Posted by Arun Uday on September 19, 2007

It appears that after nearly 3-4 years of frenetic activity, VCs, entrepreneurs and technologists are entering a phase of self reflection. Ref. – Fred Wilson’s piece, Read Write Web et al. The dampening impact of the sub prime crisis is already too well documented for further elaboration. The big question now is whether and to what extent will the spill over to the tech world happen. (Worth mentioning here that real estate and financial institutions happen to be big advertisers on the net and needless to say that both of these sectors have been thoroughly whipped by the current turn of events). Coincidentally, I was watching an interview of Henry Blodget, one of the alleged villians of the previous dot com bubble (along with some others of his Analyst/IB ilk such as Frank Quattrone, Jack Grubman, Mary Meeker etc – all employed by blue chip Inv Banks on Wall St.). And he admits there that back in the 1.0 heydays, things had gotten so hyped up and the whole air so full of pretension that everyone “understood” what was happening, that for someone to seem unbelieving or doubting was like signalling to the world that they had fallen out of tune with the times. In such situations, it takes a proverbial simpleton to call the bluff on the emperor’s new clothes. While VCs aren’t particularly incentivized to play that role (if anything they are highly incentivized to do exactly the opposite), I have decided to take that risk in any case. Consequently, I have to admit here that as far as YouTube goes, I “still don’t get it”. I will in fact go a step further and say that some of the froth we see today has been an indirect consequence of this “YouTube effect”. And I say this with full realization of the fact that the emperors we are talking of here are no ordinary ones either – one of the most revered VC firms on the planet – Sequoia and the world’s largest “startup” with a $160 bn mkt cap – Google.
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LBOs demystified

Posted by Arun Uday on September 7, 2007

Given all the publicity (both positive and negative) that PE firms are getting these days in the media, some of the industry related vocabulary seems to be coming into the fold of common parlance. One such term that seems to have successfully garnered some popular attention (in India), thanks to the likes of Tata (Corus) and Birla (Hindalco) who have been famously employing it for their acquisitions is – “Leveraged Buyout” or “LBO”. When people learn about my PE affiliations, the question I sometimes get asked is – “What is this LBO thingie?” Now, who’s to explain that what I do in my job here is strictly not the financial engineering driven LBO stuff that Wall St. PE buffs are famous for (and nor is it strictly Silicon Valley style “VC”. So, what’s it that I do? – Will save that for another day…). Nonetheless, I can’t work in a PE firm and appear to be not knowing what an LBO is. So, after stretching my imagination a little, I contrived a real estate analogy to explain the same, which has met with a fair degree of success as far as a satisfactory response to the enquirer’s query goes. And it goes thus. Read the rest of this entry »

Posted in LBO, private equity | 9 Comments »