[Podcast] Investing in Unlisted Companies: What's the deal?[Podcast] Investing in Unlisted Companies: What's the deal?

In this episode of the Capitalmind Podcast, we dive into the world of unlisted and private securities, exploring key topics such as:

• What exactly are unlisted and private securities?
• How do you value them, and what complexities should you watch for, like liquidation preferences and ratchets?
• Who can you sell these securities to, and what about corporate governance risks? Are these investments or just consumption in disguise?
• We also explore opportunities in the SME segment and how much of your net worth you should allocate to private investments.
• Whether you're considering investing in a friend's business or a pre-IPO startup like Swiggy, this episode will help you navigate the complex world of private markets.

 

Transcript of the Podcast

Intro: [00:00:00] Hello, and welcome everyone to the Capitalmind podcast. If you'd like to know more about us, visit capitalmind. in, and if you'd like to invest with us, do visit capitalmindwealth. com.

Akanksha: This podcast is for informational purposes only, and should not be relied upon as the basis for investment decisions.

Akanksha: Clients of Capitalmind may maintain positions in the securities discussed in this podcast.

Shray: Hi everyone, and welcome to a new episode of the Capitalmind podcast. In today's episode, we take a look at unlisted and private securities. We look at what they are, how do you value them? What unexpected stuff exists on the cap table, including say liquidation preferences or ratchets and why understanding this matters.

Shray: Who you can [00:01:00] or are allowed to sell your unlisted securities to. What about corporate governance concerns? Is this whole exercise just consumption masquerading as an investment? What opportunities does the listed SME segment offer instead? And finally, what percentage of your net worth should you allocate to private and unlisted securities?

Shray: So do listen in to see more about this investment category.

Shray: Hi Deepak. So you recently did a segment on CNBC where you got into unlisted shares or unlisted equity. And I think it was really well received. And we felt since TV has so many restrictions, we could do a slightly longer episode on the topic and really dive into it and see what role unlisted shares and equity should play in our investment portfolios.

Shray: So maybe I'll start with a very simple and basic question. What are these unlisted shares? And what's the difference between a private limited and a public limited?

Deepak: I say, yeah, indeed, in fact was a good discussion on [00:02:00] TV, but there was obviously a lot still left to be said. And in this podcast, we can say whatever we want, whenever we want it.

Deepak: And then the, good thing about this is it gives you like this larger canvas to talk about a lot of things around unlisted shares that perhaps are very esoteric and don't belong in, you know, like in a, in a blog post. Sometimes it sound like a, a edge case, but it's nice to have to be able to be able to discuss this.

Deepak: One of the things that's happening as a fact today is buying a share saying it's unlisted. And the context today, perhaps we'll cover this over time, is I get an email saying I can buy Swiggy at 390 rupees a share. Is this good? Now, in a, in a public limited company, I would tell you that 390 rupees is too much or too less because there's a market.

Deepak: And then that market there's a price and if you look at that from that price lens and from the lens of oh, you know, there's a 10 years of financials and all that stuff. I can look at that and kind of evaluate a price. What do you do with an unlisted company? It's not yet listed. [00:03:00] Somebody's giving you a price.

Deepak: So we'll uncover this in a little more detail because it's not an easy subject. It's not something to say that you should be discouraged, but I think it is useful to understand that this is very different from the listed market eventually an unlisted company can even become a listed company. And in the process of doing so, they will unravel a lot of structures that they have created as an unlisted company, which therefore you should be aware of as an unlisted investor.

Deepak: So first thing, what are unlisted companies? So the traditional, most traditional form of unlisted would be well, you know, my friend is starting a business. He needs some money. I could give it to him as a loan, but he's like, dude, I could lose all the money in this business because this is a test and we're trying to build something.

Deepak: So I'm like, I'm happy to participate if you give me the upside, because if I gave him a loan, it became very successful. He just give me my money back plus some interest. But if it grew really big, Then I could get 10x my money and 50x my money and so on. So there is a financial return to that effect, but it's also because it's my [00:04:00] friend and I want to see him succeed and I want to make sure he gets his project off the ground and to a certain extent help in the idea and so on.

Deepak: This is. the form of unlisted investing that has existed. Now it's gone into one level higher, which is the, oh, it's an established company. You know about it, but it's not listed yet. Let's buy it. Maybe it'll go IPO. And then from here, we'll take it forward. But there are two basic kinds of companies.

Deepak: There's private limited companies and public limited companies. The private limited concept is just limited liability. It's like saying, if I invest five lakhs into a friend's company and he takes a big loan, hundred crores, the bank can't come after me saying, Deepak, you own this five lakhs worth of shares.

Deepak: Please give us back our hundred crores. that would be unlimited liability. My liability is limited to the five lakhs I put into the company. If there's, the company loses more money, it is a different entity from me. Not, I don't have to pay back any of those loans. So because I want a limited liability company, because I mean, I don't want the liability of [00:05:00] somebody else's loans coming on me.

Deepak: But the other thing is private versus public. What is the difference? So in a private limited company, you have a lot of rules which say, This is a closely held company, less than 200 shareholders. The shareholders can decide that they elect a board, right? The board can say, well, I won't let this shareholder sell to some third party shareholder.

Deepak: You can restrict transfers. So if you're buying into a private limited company, know that you may not actually be able to get, get to transfer your shares to anybody you want. Because the shareholder, you know, they can, for instance, if you own Capitalmind shares and we, you find that somebody else wants to buy the shares, I will look who's that person.

Deepak: If it's a competitor, I might say, no, we have the ability to say that because we're a private limited company. But I think in public limited companies, you can't restrict it. Now I say that, but NSE, for instance, is a public limited company, but they're restricted according to certain SEBI so they do restrict transfers as long as they're unlisted.

Deepak: When they're listed, they can't stop. But when they're unlisted, they have to ensure there's somebody's a fit and proper [00:06:00] and all that stuff. So there can be some regulatory restrictions because of different reasons, but the concept of a public limited company is you can have as many shareholders as you like, but it's public does not mean listed.

Deepak: Public it just means public and there are deemed public companies. For instance, if you're a subsidiary of a public company, you're a deemed public company. So the same disclosures, the higher disclosures that go, there's some rules about independent directors, rules about rotation of directors, all of which don't apply to private limited companies, they apply to public limited companies.

Deepak: And some compensation rules as well. So it's a, it's a big bunch of the, if you're an investor, you should know. And by the way, this applies to ESOPs in private limited companies as well, because effectively the ESOP gives you the right to own shares of a private limited company. Many of them don't know this.

Deepak: But they are not able to, they cannot exercise those ESOPs and transfer it to anybody they want, even if that other person wants to buy it, because the board can say, sorry boss, you're not transferring. So, to that extent, understanding the idea of investing in unlisted shares you should understand whAther you're [00:07:00] investing in a private or a public limited company.

Deepak: Most companies just pre IPO, turn public. And when they turn public, before they get listed, you can, you can transfer your shares to anybody you want, they can't stop you.

Shray: Fair. So that's very helpful. I'd like to just riff on that point you made on Swiggy. So someone is potentially offering you 390 rupees a share on on the Swiggy example, and hopefully they'll go public in the near future and get listed rather than not public.

Shray: But how do I know what's the right price for an unlisted company? I mean, on the stock market, I can sort of just see what that means, what 390 rupee means, what's it's trading at and so on. But how do I figure this out when someone comes and offers, Hey, here's. This unlisted company had this, this many rupees.

Shray: What should I do?

Deepak: You know, this is a great point because if it was simple enough, I would have told you this is the price. The problem is VCs have come and complicated the whole lot. Now earlier. Just be like, oh, I'll buy equity shares. They're equity shares. then they were models created on top of equity shares. [00:08:00] So their equity shares, but they're not as equal.

Deepak: They're more equal than equity shares. So what does that mean? I mean, no, you have preference shares. Then you have compulsorily convertible preferences. I mean you can convert it to equity if you want, but their preference. So they give you ownership. But they also retain a higher level of ownership than anybody else.

Deepak: So a Series A investor will do a CCPS, a compulsory convertible share. And then you may have a Series B doing a CCPS. A Series C does a convertible debt, a compulsory convertible debenture. And they're optionally convertible preference shares. There's all sorts of things that can happen, multiple series.

Deepak: So you may be looking at the company and saying, Oh, there are only 100, 000 shares. This sounds great. But it could be 10 million shares of in CCPS after conversion. So there could be 100, 000 CCPS convertible to 10 million shares. So you have to look at the dilution in total and then figure out what price per share.

Deepak: So if you think this company is going to make a thousand crores in profit, [00:09:00] how many shares is the thousand crores divided into? It could be one crore, it could 10 crores. The price per share will obviously change if it's one crore versus five crores versus 10 crores shares. So to unravel this, you need to get the entire cap table.

Deepak: You need to get the terms and conditions for each each ccps and you need to get a bunch of other things which are called terms. Now this is where I'm sorry, but life takes a devious turn at some points. Now you suddenly start needing PhDs to understand this stuff. Okay. So there will be a guy who comes in as easy and have something called a leak prefer liquidation preference.

Deepak: This sounds great, but liquidation preference is simple. I'm giving you this much money. I'm getting so many shares, but if I give you this much money, if you sell the company at some point, first I take out my this much company, Now, my money, that's mine. On top of that, that is called a 1x liquidation preference.

Deepak: If I do a 2x, that means if I give you x, I'll take 2x of the money out first. Whatever's remaining is split between the shareholders. That's a liquidation preference. Then there's something called a right of first refusal. So, in a [00:10:00] company, VC can say, I'll Fine. We will invest in this company. But if any of you shareholders sell to anybody else, you will first come to me and then give me the shares at that price.

Deepak: I have the right of first refusal. So I can buy the shares from you at this point. So let us say I want to buy a share in some company. Maybe I don't know, Uber or Ola or something like that. But I went in and said, I love this company. I'm going to buy it. I did all the analysis. I did say, oh, 300 rupees per share.

Deepak: And then I go the, the seller wants to sell it, but he says, oh, I have to go to my board. The board says there's an ROFR, right of first refusal. The VC says, I don't like Deepak Shenoy. I don't want him to invest. So I'll, you know what, what price is he paying 300 rupees per share? I'll pay you 300 rupees per share and I'll buy it.

Deepak: So I did all this work for nothing. So there is that problem that you might end up. And what happens then is. The sellers are aware this is a problem, but the buyers are also aware that it's a problem. So they're like, listen, why should I do this work if in any way you have an ROFR, right? So your value of your unlisted share comes down because you don't have a seller anymore, or you have [00:11:00] less sellers.

Deepak: So you should in your mind say, if I buy an unlisted share where there is an ROFR, it automatically lessens its value for me. So I should pay a lower value for it if I want to buy it, because this is an ROFR. So then there are other clauses, some ratchet clauses, for instance, the company raises at 100 crores of valuation, but because life goes bad, it comes down to 50 crores.

Deepak: The 100 crore investor says, well, I give you money at 100 crores. You raise more money at 50 crores. My money should be taken as if it was raised at 50 crores because you raised a down round. So this is a ratchet clause. It increases somebody else's shareholding. And if you are a minority shareholder in this company, it reduces your shareholding even further.

Deepak: So you should know about this. Then a bunch of other tag, tag along, drag along clauses. And Which branch are you buying? How many shares does it convert to? What are you buying? What effective ownership does it mean? All of these is a little bit of a pain to understand. Nobody does it because everybody's like, I trust you, boss 390 means something. This is what it is. But, [00:12:00] you know, honestly, as a person who's been in the space, there is a lot of misinformation going around. Somebody can tell you something and suddenly you'll be like, excuse me, wait, wait, wait. What is that? For instance, right now, NSE is going through a bonus issue.

Deepak: Now. It's a one is to six bonus issue. That means if you buy the share at 5, 000 rupees, you should be getting six shares for it. But there's a record date. I don't know when that record date is. If you buy after that record date, you should be paying one sixth the price per share. You don't know when the record date is.

Deepak: You think you know, but you need to go and ask somebody in NSE first, boss, is there a bonus going on? Tell me the date on which the record date is. So if I buy after that date, I will pay one sixth the price. If I buy before that date, I will. And please tell me that this is true. Now, the number of people who know this enough to ask this question are probably 1%.

Shray: I mean, they may also getting a response may not be trivial.

Deepak: Yeah. And getting a response may not be trivial. So if you know there's a bonus going on, literally give it a month. So, boss, you finished your bonus, and [00:13:00] you can also go to MCA and download all these documents. If there's a bonus issue, they would have put it in their board meeting, they would have put it in their this thing.

Deepak: So, some minutes may come across. Having said that you still need to verify. So, all of this stuff is going there. Now, let me talk to you about, like, this liquidity, liquidation preference and how it screws what you think. Let's say a company has a valuation of, of 150 crores. So it's been valued at 150.

Deepak: The VC is putting in 100 more. So that means now it's valued at 250. 100 plus the 150 earlier. You have let's say 5 percent of this company because you were an early helper or something like that. Now you're thinking I have 5 percent of 150 which is 7. 5 crores. Which is great. Now, I have 7. 5 crores worth of something that is 250.

Deepak: That means 3 percent of the company, which is also great. And this is a liquidation preference of 1x. This was a 200, 250 crore valuation. Now, something happens that company cannot be sold at 250 crores. Somebody makes an offer for 150 crores. They decide to take [00:14:00] it. Now you're thinking, oh, well, you know what 150 crores, I still have 3 percent of the company, so I should get 4. 5 crores. It's still not too bad because I invested maybe one crore in the business or two crores in the business. I'm still getting some money. Here's where the problem is. Liquidation preference of 1x means 100 crores which was invested by the VC goes back to the VC.

Deepak: So out of the 150 crores that was paid for the company, 100 crores goes straight to the VC. Only 50 crores is left. Maybe as a participating preferred, in which case your 3 percent is of that remaining 50 crores. So you get only 1. 5 crores back. So you were worth. 7. 5 crores at some point. You thought it fell to only 4. 5 crores, but it's actually worth 1. 5. You had no idea about this, but you should have known because it effectively hurts you at this point. This can happen at any stage of a business. And I think if you're aware, then you should know this and mark this down. There are ways to mark it down from a premium, but essentially take each of these points and say, boss, [00:15:00] I'll give you 5 percent less for this and I'll give you 5 percent less for that and so on.

Shray: Alright, but Deepak, this all sounds like, if I may call it, complicated cap table stuff, which I have really zero interest in being able to do because it's hard enough to do it for a company you're involved with. Going and downloading this stuff from MCI, I'll just take it on faith. But can we just maybe not get caught up in these horrible cap table stuff and assume that works out?

Shray: Can you tell me? How do you actually value a startup? Like, how do you even know, let's say there was only one class of shares and it works as simply as like a public stock where there's like number of shares into price and that's a market cap and such is life. How do you decide what that price should be?

Deepak: This is great because now you're going beyond the capital stuff and this is very boring accounting stuff and then going into actual like cost of business. Now, I would say here there is two ways to value a business like this. One, let's say a friend is starting a business versus which is very disruptive.

Deepak: It's a huge game changer 10 years from now. you want to participate in that business just because this guy can change the world. And when you can change the world, you know that your win is [00:16:00] absurd. It's fantastic. versus if you're looking at a small business where the guy is going to become profitable very soon, maybe an IT services company, the guy is saying, listen, give me one crore or give me 50 lakhs.

Deepak: I'll take it from a few people. And I will grow this business to a point where you, you know, we'll be earning so much profit that we'll be giving you a dividend every, every year. Now you're thinking is equivalent here to saying, listen, I'm investing in something that could go bust also. Yes, but can also, I'll give somebody one crore.

Deepak: And eventually I could earn a dividend of 50 lakhs per year. So the 50 percent return on my initial capital, maybe it'll take four or five years, but that's still a ridiculously good return on capital. So I'm looking at it as that. And worst case, if I can't do that, then somebody else is going to value this 50 lakhs a year.

Deepak: As a stream of capital, give me 20 times it. So roughly 5 percent to 6 percent of that, because assuming interest rates are 5 percent at that time. So you take [00:17:00] 20x that and you're, because it's a growing dividend, right? Because this guy is going to keep growing as well. So for a 50 lakh growing stream of income every year, I am willing to pay 10 crores.

Deepak: Then somebody else can buy it for 10 crores. So maybe that is what the eventual value is. Now you're looking at small numbers. I'm interested in 1 crore, I'm going to get 10 crores. Relatively small in terms of 10X, it's not the 100X or 1000X, but it is actually quite meaningful as a return, if you got it right.

Shray: If the process you've just described, I mean, this is kind of the process we use with public markets as well, right? Like what's Ola Electric worth today? I guess at some level it's anyone's guess. Should it go up tomorrow or go down? I mean, we really have no clue. So is this process you just described any different for unlisted shares versus listed shares?

Deepak: You know, there was a serial called Silicon Valley where this guy actually says things like, don't make a profit. What do you mean revenue? I mean, actually not even profit, revenue. What do you mean revenue? So we've. Pre revenue. He's like, why? No, no, because if you make revenue, then they're going to value you at multiple of revenue and then you'll never be able to meet their expectations.

Deepak: So [00:18:00] you should be pre revenue so they can value at anything they want. So public markets kind of transcend this madness to a point where they'll value at something. Obviously that like, for instance OLA Electric, they've come in and made a bunch of promises. The stock goes up tomorrow. They're not able to keep those promises.

Deepak: Stock is going to get hammered. It is the way of the world. It is, it is not like, because there's going to be a report card every single day. Unlike in the private unlisted market, nobody trades your stock every day, right here. If they don't like what you said in some random Twitter comment, they will hammer your stock down and they'll bring it down to like 40%.

Deepak: And you'll be like, okay, boss, sorry. I didn't mean actually what I said, or I, I, I, I think we can do better. So at some point, the feedback loop is way faster in public markets than it is in private markets. But you're right. The valuation metrics are roughly the same. The idea is, can you get to a point where this company becomes big?

Deepak: Now, in unlisted companies, the difference is you don't know how big the market is. You may be very, very new. So today, for instance, [00:19:00] we know that electric vehicles have a huge market share growth path, et cetera, et cetera, because we can estimate the number of vehicles in India. You can say some of them will turn to electric.

Deepak: So my demand will come, but we really don't know the demand of something that is a new technology. Maybe it is hydrogen. I don't know. Just giving you an example of that. Maybe it is not even viable today, but there's a person doing research and he's found something. He says, I think this is great commercially acceptable, this thing, but I still have to run it through that test.

Deepak: You know that if this becomes successful, this is going to be even better than electric because hydrogen is very widely available in the form of water. You can, and somebody has found a way to synthesize hydrogen from water at a very, very energy efficient process so that it can power a car. So if you actually got it right, you would change the world because you could create a world in which you are filling your car with water and it is going somewhere, which is quite remarkable.

Deepak: Right? And you, you can see the potential of this. How do you value this company? I, I don't think you [00:20:00] can say that. Oh, it's worth, worth. 10 million or 20 million or 100 million. You have no idea. So you say, boss, what value do you want? Well, it sounds like 5 million. Okay. You've done so much work. Fine. I'll put it at 5 million.

Deepak: And I'm hoping that if you really succeed, this is worth the hundreds of billions of dollars. If you don't succeed, well, it's zero. And I know that. So at a certain level, it will be a leap of faith for the disruptive companies. But for everybody else, it'll be like, oh, you're going to make 30 crores. Oh, so I can value you at a average of those.

Shray: You know, just wanted to point out, and I think I have noticed this, that when we talk about unlisted chairs, we often talking dollars, millions, billions. But when it comes to public companies, it's back to crores and rupees. Just saying every done. That is so true. That is so true.

Deepak: I, I think the problem is, you know, I talk to VCs, I have to mentally convert crores to to dollars.

Deepak: So they'll be like, I'll tell them, no, the markets were 24 lakh crores. They'll be like, huh. I'll be like, okay, that is about $300 billion in, give or take. So they'll be like, oh, okay, okay. So I'm like, still big, still big. It's like, it's still big. [00:21:00] 24 lakh crores sounds more meaningful to us because we deal with those numbers all the time, right?

Shray: So it's, I guess there is a difference in universes and what's the currency you're keeping your scorecard in. All right, coming back, we have some idea of arriving at, this is a good price for this unlisted security. What are my exit options? You know, one of the things I love about, public markets is that you don't need permission from anyone unless you're like some promoter or something.

Shray: You can just go on some app, click sell. And for better or for worse, you can be out again in normal situations. But when it comes to an unlisted security, who can you sell to? I mean, who's there?

Deepak: This is a, this is a phenomenal question because people don't look at this. They look at ownership and price.

Deepak: They don't look at saleability, right? So at some point you may own. X take in a private company, but if you're not able to sell it, it's worth exactly zero. And if there's no buyer for it. So to that extent, you have to think of exit options in the earlier thing. Let me give you the most simple exit option, which [00:22:00] is, I want to sell it to somebody else.

Shray: Which is what you kind of do in the stock market, right?

Deepak: Yeah, which is what you do in the stock market. Here, you have to find your seller. That's the stock market's more anonymous. So you go to find a broker, you tell him, okay, find me a buyer. He says, I'll take 3 percent boss. I say, okay, fine. I'll give you 3 percent and just go find me a buyer.

Deepak: And then they take 3 percent to do this thing, which is this is what brokers used to do. And that's what they used to get paid for. Now they just set you an electronic interface to an exchange and they charge you, you know, 10 bips because they don't actually do the work of finding the buyer.

Shray: Yeah.

Shray: But the apps are very nice.

Deepak: So. The apps are nice. Yeah. So they, they, But you know, the, the, the, the power of this was that you could find it. If you, if you, if your company is reasonably popular, you'll find a buyer. And if you found a buyer, you just had to negotiate with him the price. There's a bunch of things that you do with it and you sell it, sell, sell, sell the shares and transfer the shares over.

Deepak: Unless the company has restrictions, this is a very straightforward process. This is also a difficult process because not every company gets so popular that people want to buy it. Not every company gets buyers of the size that you want. So you may have [00:23:00] invested say 1 percent in a company at 10 crores of valuation, which was 10 lakh rupees.

Deepak: Now it's say a thousand crores in valuation.

Shray: Lucky you.

Deepak: Let's say. And then you are now, you're looking at 1 percent of thousand crores, which is 10 crores. So you're going to find a guy who's going to give you 10 crores, or you're going to find a lot of little guys who give you add up to 10 crores. Both of which are a pain in the ass.

Deepak: It's going to be difficult once you get to size, when you may not be able to find these buyers and so on. That is the number of this thing. But let's say that the company gets big enough and then it goes IPO.

Shray: Like Ola Electric just did.

Deepak: So what, what happened over there is they had to flatten all this CCPS, liquidation preference, throw all of that shit out, convert everything to equity shares.

Deepak: give bonus shares so that the price of the share is lower. Otherwise, the price of the share will be one lakh rupees of shares because there are very less shares issued in the first place. So, then you issue bonuses because you are able to, you know, kind of capitalize that premium that you've received and you therefore, you know, go public.

Deepak: When you go public [00:24:00] as a pre IPO shareholder, you get to participate in the public markets after six months, which means for six months you're locked in and then you can sell whenever you want. The only problem with that is a lot of people are thinking like you, including the VCs who invested in the company.

Deepak: So they're like, hey, wait, we have VCs, we invested in the company. Now our mandate to our customers was that we should help these companies and take them public. They've taken them public. Now investors are saying, listen, boss, give me my money back. You're done. Now, this guy owns like 10 percent of this company, which is worth 20, 000 crores.

Deepak: He has to sell 2000 crores worth of shares to be able to return his company. When does he sell it? After six months, which is the exact time when you're trying to sell it. So you're going to see this potential problem at six months where the people are not able to find buyers enough buyers and the prices tend to decline.

Deepak: Now, recently, what's been happening is some of the startups have understood this and already have started setting up deals saying, listen, these shares will open up in six months. can you please tell us if you're interested, we'll get you buyers in the first place. [00:25:00] So as time goes on, we've, we've, in fact, benefited from this.

Deepak: There was a company that, I won't name, but we bought it in roughly something like this in search India in the PMS, where we bought it. After we bought it I mean, the reason we bought it was, it was going down in price and I was on, I wasn't sure why. I asked around, I found out that this company is being sold by its investors because they said we don't have a mandate to hold it anymore.

Deepak: So they were selling it at 30 percent below the market price. I thought it was worth more. So it was at 2, 800, 200. We bought around that 2, 200, 2, 300 levels. It went to 8, 000. I think I sold about 7, 000 or something, but this forced selling provides opportunities to buy it even in the public markets. And you might be the other side of this for selling if you are also forced to sell.

Deepak: So in one way, as a private pre IPO individual investor, you may not require to sell. So when all these people are selling, you should just say, I won't sell. And then when they finish their selling, you should say, okay, I will not sell now. So. That's the second. [00:26:00] Then the third is an acquisition. So it's a private company.

Deepak: It goes up to a certain size. Somebody comes in and says, I want to buy you. Now it happened with YouTube. YouTube was a company. Google said, let me buy it for a billion dollars. Fantastic sell. Of course, it's worth a lot more than a billion dollars today, but it was at that time a good deal. WhatsApp was bought by Facebook.

Deepak: Instagram was bought by Facebook. Lot of such small companies have been acquired by other companies larger than them in size. And in our space itself, I think Kuvera was bought by CRED and so on. Now, one of the things that does happen in the unlisted space, and this is an unfortunate consequence, is that if an unlisted company buys you, you may not get cash.

Shray: What are they buying you for?

Deepak: So they're like, listen maybe you're worth X, maybe you're worth, I don't know, 200 crores. But if I don't want to pay you 200 crores, so guess what? I'll pay you in my shares. I'm a company, I may be valued at 5 billion or whatever, 50, 000 crores. Or 20, 10, 000. I don't know, some very large number.

Deepak: So I'll give [00:27:00] you 200 crores worth of my shares. So you're looking and saying, that's fine. Now you could keep doing this using your stock as currency, issue new shares to give to me, right? But there's only one problem. There's a department called the Income Tax Department, which is like, hello, uncle, excuse me, you can do all this stuff.

Deepak: But this 200 crores is value that has been received by Deepak Shenoy. Therefore, Deepak Shenoy should pay tax on 200 crores. So I'm like, listen, you crores of your stock and I have to pay the income tax department 60 crores. So then you know, the other company will be like, okay, fine, man. I'll give you 60 crores of cash.

Deepak: I'll give you 140 crores of my stock. So I'm like, wait, I'm not making any money out of this. I'm getting 60 crores, but I have to pay it as tax. Well, too bad. You want to sell or not? So I get 150 crores, 140 crores of some other company. I get 60 crores of cash, which I quickly pay the income tax department.

Deepak: And then I have to hold the shares till whenever this other company gets sold or acquired or goes IPO or whatever. So there is a problem where you might say there's an exit, but it's not really an [00:28:00] exit. It's more like an entry into something else. And it's a forced entry. And we've seen this because. In ThyroCare's case, the ThyroCare founder ThyroCare was acquired by FarmEasy.

Deepak: We'll come to that at a later point. But ThyroCare founder got FarmEasy shares as compensation for his ThyroCashes. He could have sold his ThyroCashes for real cash because ThyroCare was listed. But they made this deal where they would give him farm easy shares in exchange and some cash.

Shray: And I guess a premium, right?

Shray: I mean, they were doing it at higher than the market cap.

Deepak: At higher than the market cap. And they made this offer to shareholders as well, and a bunch of things happened and all that. So they effectively acquired the promoter stake of farm of Thyrocare. Unfortunately this had consequences and I'll talk about that later, but more importantly, what, what happens with this in such a situation is that you kind of get in this disappointment zone of abhi aur kitna, because the second company could get acquired for the third company for, for stock.

Deepak: Surely not. And the possibility is like, for instance, one of these things happened with a friend who's Company got acquired by the, by a U. S. company [00:29:00] before 2022. It was 2021. Life was great. Post COVID, blah, blah, blah. They get acquired. He gets 30 percent in cash. So he uses that money to pay his taxes.

Deepak: He gets the shares. The shares are worth 10, 000. X. Let's say 10 a share. It was 20 something dollars a share, fell down to some 2 a share.

Shray: Ouch.

Deepak: After the Ukraine war. So 90 percent fall means if he sold his company for X million dollars, here it's dollars only because he sold it in dollars. It was X million dollars.

Deepak: It is one 10th of that X million dollars when because he had to hold his shares for six months, it was locked in for six months. So you end up with a situation where

Shray: even though the company buying him was a public company. Okay.

Deepak: It was locked in because the rules in the US are if you should use shares to buy another company, the shares are locked in for six months.

Deepak: So because of that, he was like, dude, I can't believe I sold my company for one 10th it for. But there's nothing you can do about it. So sometimes this acquisition by shares works really against you, especially if it's a [00:30:00] bad market in that time. But having said that that is one way. There are two more, and I'll talk about those.

Deepak: And these are the bad parts. The third part can become the acquisition is usually good. The IPO is usually good. Somebody else buying your share is usually good because you don't sell at a loss for the most part. The bad part would be if it becomes a zombie company. Great company, restaurant. It's great. I put the money in.

Deepak: Now it's earning one crore a month, but That's all it's earning. I know that this company, the restaurant will last five years and if they don't increase that one crore a month, I will never see a real major inflation because at some point his costs are going to come. He's going to have to renovate. He's going to, he's, he's going to, he's going to not be able to distribute those profits meaningfully.

Deepak: But it, is there and it doesn't grow beyond that point. And he's tried his best, but it's not growing. It's become a zombie company in that sort of sense. It could also be a zombie company because the founders just lose their mojo and they're like, okay, we're earning some money. No chalega, let's keep it at that.[00:31:00]

Deepak: So we say, okay, fine. You keep it at that and that's it. But this is fine. This is fine for a certain set of companies, but I was, I fired myself in my first company because we had become a zombie company in the sense that we could, we were making enough money that we could survive, but we were just not growing.

Deepak: At some point, I realized I was the CEO of that company, but I had to fire myself because I was probably between that company and success. And I did. I had fired myself. I went and got another job and all that stuff because you could be a zombie company for a long time and not even realize because you're getting the money and every day you're working.

Deepak: It's like, you know, you're running those, those hamsters in a cage that are running to be in the same place. That is your zombie company, right? And then of course, the last thing is death because in case the company doesn't succeed, it just has to die. But I'll tell you one of the things that happens in this case and as an investor, you should watch out for it.

Deepak: Lets say you invested 50 lakhs in a company and it died. Now, it doesn't die normally, right? Because these guys try every single thing. Then one day they have to fire the [00:32:00] employees. They stay on as founders, trying to do something, raise some money, this, that, that. Then one of these days you're going to call them up and say, listen, it's over.

Deepak: Let it be, finish karo or aagey bado. So go in front, go, go look in front and move on. It's okay if I've lost the money. But my ask of you would be. Go and tell the founder, buy my shares at one rupee. If he doesn't have that one rupee, tell him to allow you to transfer it to your wife, to your father, to your mother, to somebody, you know, at one rupee.

Deepak: Why do you need to do this is because you need to show that 50 lakh loss in your book and the income tax department will never agree that a loss has been booked unless you've actually sold the share. You haven't. So the company will become, you know, it'll be zero. And it may take a long time for it to be worn down.

Deepak: You just sell your shares and be, get rid of the liability for yourself, but not liability. I'm getting, get, get, get your tax loss, because tomorrow you will make profits. Like we are in a roaring bull market. You're probably having a sitting on a ton [00:33:00] of profits. If you make a 50 lakh rupee loss, you can book a 50 lakh rupee profit in your mutual funds and stocks and pay no tax.

Deepak: So effectively save 12. 5 percent of that money, right? So your 50 lakh rupee loss is worth 10 12 and a 6. 25 lakhs to you, you should recognize that and take it. That's the only thing I would say, even in death, there are opportunities, but this is this is one of them.

Shray: Look, Deepak, I have to say so far, we've tried to keep the questions fairly factual, but the fact is there's a fairly negative.

Shray: If I may call it undertone or tenor has crept into most of the conversation so far. The fact is that there seem to be so many challenges around cap tables and so on. So and then there's who can potentially buy this. Is the company restricting that? Do you know what the price is? So maybe let me just ask this question.

Shray: Why would you invest in unlisted securities? What makes this worth it? So far, it just seems like All this work, and there's no transparency, there's low liquidity, so many restrictions the stock market is perfectly happy giving you shares and options without any of these restrictions. So why does anyone even care [00:34:00] about this?

Deepak: This is great. You, you got a right point because you know, at there's no transparency, there's low chances of success, there's shenanigans that happen. We'll talk about those, but. Let me give you an example. On this TV channel when we were talking about this, on the same time when I was on the channel, they were talking about CSK, the cricket team, the Chennai Super Kings.

Deepak: Now this is apparently a company that's unlisted. It is, and shares of it have been going around 175 rupees a share. So I go to their website and download the annual report, which was 2023 at the time. This is on that same day. The 2023 annual report shows an earning Consolidated of 34 paise per share. So I'm like 34 paise per share.

Deepak: Why am I paying 175 rupees? That sounds absurd. So unless there's a lot of growth and all that, so I need to now analyze this company, right? Why would I buy the share and how would I actually analyze it would have to be that it makes a lot of money. Now I have to analyze how much money it can make and it should be making hundreds of crores, but it's making tens of crores, but maybe [00:35:00] in the future it can.

Deepak: But the same day, right? By the evening, they had released the 2024 annual. Here, they had made some 230 odd crores in profit and it was six rupees per share as earnings per share. Now, for a six rupee earning per share, for a brand as popular as CSK, I would pay 175. That's less than 30 times earnings.

Shray: Also, there's, you've not even brought in the Dhoni Halo effect.

Deepak: And you know, all that stuff. So suddenly you could, actually say that if this company continued on this route and and IPL has even got more popular sales, the chances are that this company could earn a 20 rupee earning per share, in which case at 30 600.

Deepak: So my 175 becomes 4x right there, right? And even imagine if I had bought it much earlier at 20 bucks or 30 bucks, I would actually get it at, get a fairly big jump on my, on my return. So yes, there are huge potential returns possible. And I'm not even talking 5x, [00:36:00] to give you an example of swiggy. We checked the cap table of this and we said, okay excellence, I've got, I think roughly about 20 percent of that time, I suppose for about 2 million about into Jan 2016, 15, something like that.

Deepak: And perhaps it was a 10 million valuation. 10 million. Yeah. I think

Shray: that's

Deepak: fair. Yeah. That sounds, that sounds fair. It is now eight years. And it is valued today, perhaps, if you, if you believe all the market reports at 10 to 15 billion, that's a thousand to 1500 X. Assume some dilution has happened because other people have come in and so on.

Deepak: And that initial investment is probably worth 400 X of what it was. Now I would. Give a lot of money for a 400x return. I mean, it would be fantastic to get it in eight years, in 10 years, in 15 years. There is absolutely no reason why you would think that this is a bad investment. I think this is what's attractive about the private market is that you have absurdly high returns where the things go right.

Deepak: And think about [00:37:00] it, Swiggy has actually changed behavior and that is why it has got this massive return. So, to a certain extent, you invested in the people. Perhaps you knew Sriharsha at that time. Perhaps you knew him personally and you said, I think you're great, man. You can do something. I think whatever it is you're doing, I'll do it.

Deepak: I'll, I'll go for it. I'll invest in you. You had faith on the people. Many times it's the team that, that, that makes a difference. So even VCs invest in a team. So the stronger the team is, the more likely it can keep growing and, you know, building it. Well, technically, but it's not stronger means anything.

Deepak: It even WeWork failed for that.

Shray: Let's not go there, but okay.

Deepak: Yeah. So, but failures apart, you're betting on people. And in the early stages, it might be like, for instance, a friend's starting a restaurant. You could bet on your friend. I mean, you're not going to look at the restaurant and say, I'm going to invest in it.

Deepak: But it'd be like, you, you figure it out. I'm giving you money and you know if it fails, it fails, but I don't know how to understand a, a restaurant business. Oh. Here it's different Now. Lemme tell you what can be [00:38:00] disruptive and it's crazy. And we have a stock like this in our portfolio called tips.

Shray: Ah, so even some public market stocks do display these characteristics. Sure.

Deepak: I guess very, almost like, let's put it this way. It was sleepy, old, boring. And suddenly it becomes super interesting because the whole world underneath it is shifted. So tips is, they have music rights to a lot of movies and music and stuff like that.

Deepak: Think very boring, yeah? They make cassettes and they should sell a cassette or a CD when you play it. bought the CD, you paid a certain amount of money. Tips would make some money out of that. And then you go and play it a hundred times in your house, 5, 000 times in your house. It doesn't matter because you paid for the CD.

Deepak: So per CD, you would get paid once. It went a little bit further in when iTunes came in, 1999 or something like that. When Apple said, listen, pay per song, don't pay for the whole CD. So people said, Oh, why should we and all that? But then, you know, eventually that caught in, but it didn't hurt somebody like tips too much [00:39:00] because India wasn't really on iTunes.

Deepak: But over the course of the last 10 years, the internet has gotten faster and cheaper and more accessible. People don't have tapes, people don't have CDs. I don't think many of us know people who even download MP3s anymore.

Shray: Can you do that anymore?

Deepak: You can for sure. Fine. But you don't, you on your phone, you don't store music.

Deepak: You just basically go to an app and start playing it. YouTube or YouTube music or Amazon Music or Saavn or whatever

Shray: The point is made.

Deepak: Yeah, so you stream it. When you stream it every time that you stream a. Song that is owned by Tips India. Tips India gets paid. Now this may be coming from you, from an advertiser, it doesn't matter.

Deepak: The point over here is that every single play, not every single CD, but every single play is remunerative to Tips India. They, it's not a 10x, it's not a 1x or 2x increase, it's a 10x, 30x, [00:40:00] 50x increase in terms of revenues. The stock's already gone 3x from when we, we even wrote about it on online, but It's a remarkable move for a company that's only owned the rights of certain types of music.

Deepak: It turns out this is evergreen music. You want to play this music anytime. There are some old Asha Bhosle numbers and some Lata Mangeshkar numbers. They were old when I was young. And now I am old. And they're still old and they're still popular. And you know, for some.

Shray: The artists may not be anymore. Maybe no more, but it still works fine.

Deepak: It's still, yeah, I mean there, but in this case it may not, even if they're not there, the music lives on and tips gets paid. The artist also gets paid. It changes the artist game, but it changes the tips scheme in a disproportionate way. If you think about Swiggy, that's what it's done. You would go and order food from a restaurant in 2015.

Deepak: The restaurant would say, yes, I'll deliver. Or they would crib and say, sorry, you're too far, I'm not delivering. Or, we don't have delivery boys. Or you know what? The menu [00:41:00] mein yeh nahi hai. You'll be like, dude, I called you for that. Only, you know, I want to now call somebody else for onions. I'll drop the phone, I'll call somebody else.

Deepak: I'll get onions. Now you have an app. Use the app. You can't think of calling the restaurant. The restaurant won't even answer your call. And if it answers your call, it'll be like, order from swiggy. Boy will, I don't get a delivery boy, because swiggy has taken all the delivery boys and promised them a fixed salary.

Deepak: I cannot promise people fixed salaries. I just want them to go deliver from food and pay them 50 rs piece per transaction. They don't want it. They want fixed greater stuff. So. I can't hire delivery boys because Swiggy and Zomato have taken them all, so please use them for delivery. You just tell me what you want and I'll send it through, you know, you can order it through the app.

Deepak: Now for this, Swiggy and Zomato take 25 30%. They've changed customer behavior, they've changed restaurant behavior, and therefore they have earned themselves a niche in that market. And this was a true demand game. I would say that is a spectacular return if you've invested it early. It could have well gone the other way, where restaurants would have [00:42:00] said, no, I'm not doing this.

Deepak: Or the government could have come and said, like in UPI, I'm sorry, all of this should be free. In UPI's case, I, I side with the government because it was a real need, but I don't think butter chicken should be delivered for free in, in case. I don't think we should, the government should mandate that.

Deepak: Though I know a lot of people who would be happy in certain cases, me also, but there is the understanding that. Delivery costs money, but

Shray: If I try and generalize it is that with an unlisted company, you can get in into a firm that is basically trying to change how things work and so can enjoy very disproportionate returns.

Shray: That is rare for public listed companies in general because listed companies, while they can do extremely well, it's generally more of a steady growth rather than a absolute reinvention like how tips had.

Deepak: So the US has such companies which tend to list even when they are nobodies. And you get this spectacular return like biotech companies and certain other companies.

Deepak: Tesla, for instance, was listed all through its growth and went mad. So did Nvidia. Though Nvidia, you can say, was already doing a bunch of this stuff before and nobody [00:43:00] recognized it. Amazon was listed before while it was a book selling company. And then it went and built Kindle and this and that and all that stuff.

Deepak: And it's still, so America has a lot of those companies. India doesn't. We, when we call something innovation, it's usually incremental beyond this thing. So you don't get the innovative madnesses.

Shray: Which you can, however, still get in the unlisted space. Point is taken. I'd like to shift to another thing.

Shray: You talked about the shenanigans. Now look, it's not like there aren't shenanigans in the public markets or the listed markets either. Right? So what made you call out private companies and what comes to mind?

Deepak: So, you know, let's take two examples of shenanigans, which are not shenanigans as in, you know, I don't know how the promoters are involved.

Deepak: I don't think, I mean, you would say when businesses start going bad, the decisions that might be made may be very detrimental to you. It's also true in public markets where a company can become bankrupt and your shares can go to zero. We've seen that in Bhushan Steel and we've seen in Bhushan Steel, of course, the shares didn't go to zero, but I think a few others, they went to zero.

Deepak: So DHFL.

Shray: Yes, Bank had some.

Deepak: Yes, Bank. [00:44:00] Well, not zero,

Shray: but it was pretty bad.

Deepak: It was pretty bad. And then I started trying to go back up, but DHFL did go to zero. So you had companies where, you know things went bad. And, but in certain cases, for instance, in Byju's, Byju's was valued at certain amount.

Deepak: I don't know if it was,

Shray: 20 billion or something.

Deepak: Yeah. I mean, some crazy numbers. So 20 billion is like 160, 000 crores, which would have been a large cap, almost nifty capable company today. But at some point in time, we started facing trouble, lots of trouble with auditors, lots of trouble with the government, lots of trouble with the customers.

Deepak: And then it did something, which is it took a 1 billion loan to do something buy another company. When it was not able to buy those company, it was, I mean, unable to do anything. And then what the one billion guys said was listen, give us back the billion. You told her, took it from us to buy this company.

Deepak: Well, it turns out that money only 500 million went back. The remaining 500 million is what one might call missing. So the missing part is where the equation is [00:45:00] getting dirty. Now the dirty equation is they're accusing the founder of taking away that money and there's an audit.

Shray: There's a founder saying it got stuck in other things,

Deepak: something and

Shray: whatever now it's whose side you want to take.

Deepak: So I don't know. Because of this, everything in the company is halted. There's no money to pay salaries. So what the promoter says is, listen, I don't have money to pay salary. So I'm going to raise more money. Guess at what? I'm going to raise, if I have a hundred shares outstanding today, I'm going to raise another 10, 000 shares.

Shray: So a hundred,

Deepak: No, no. I mean, 10, 000 shares. So basically they will, your hundred shares today will expand to 10, 100 shares. So you will, you will be 1 percent of the company, even if you own 100 percent of the company today. So whatever shareholding you hold is divided by a hundred tomorrow. And I'll do it at a very low price at a valuation of like 150 million or something.

Deepak: So like, I will value 20 billion. You're going to raise more money at 150 million. That's like a 99 percent destruction of my value. But you can't do a damn thing.

Shray: Unless [00:46:00] you participate in this rights issue,

Deepak: whatever. And you don't want to put in money because you're thinking that money companies.

Deepak: Essentially, I'm going to put in money and this money is straight away going to go as salaries, past salaries or income tax or something like that. Because they got sued in court by IPL for not having paid for all those t shirts that they had to, I mean, not the t shirts, but the rights, sponsorship rights.

Deepak: So they eventually did pay it off because something happened. But there are a bunch of other cases as well where people are saying, you need to pay us. So if you're putting in money today, that money is most likely gone to the extent that Byju's does not have any money.

Shray: So, But if you don't put in, you're essentially diluted to nothing.

Shray: Yes, to nothing. So now the people are going to court. Is this something that only unlisted companies do?

Deepak: Usually because listed companies, if they end up in bankruptcy court, will go through the same process, but you can't do anything because in a bankruptcy process, it is there's a bankruptcy professional.

Deepak: He's getting bids from a bunch of people. You know, there are multiple bids. You can [00:47:00] argue that certain bids are unfair. You have a say in that process, some kind of a say in that process, but here you probably don't. What happens now is that the entire business you know, of Byju's is in limbo because all the shareholders have taken it to court.

Deepak: So if you're a small shareholder, be ready to take a company to court if it does this. FarmEasy, it happened in a different way. They went and bought ThyroCare, they took a big loan. ThyroCare shares fell after they bought it. Now they were not going to sell those shares. So, they had to keep owning it. Now they had no cash flow to pay for the interest on the loan that they had received and the loan givers were like, give us back the money.

Deepak: They didn't know how to give back the money. And valuations of all companies, tech startups had died or gone much lower in 2023. So a price per share of 120 rupees, which was prevailing, I think, in 2021. went down to 11 rupees a share because also because FarmEasy raised more money at 11 rupees per share.

Deepak: So if you're the unlisted holder, now think of the ThyroCare founder who got shares of FarmEasy. He [00:48:00] thought he was getting something 120 and then suddenly it's valued at 11 rupees.

Shray: Unless he managed to sell them along the way.

Deepak: In fact, he knew this well in advance and he was selling literally like, tell me a price and take the money.

Deepak: And you know, it was not of course, he was on top of this and he knew that you know, so because In the end, if you're going to lose so much value because the company decides to raise it a much lower valuation, you might as well sell when you have the chance. So that was the, it was not a shenanigan, but it's a consequence of perhaps what happens in the market.

Deepak: But they're shenanigans, they're proper shenanigans. We've seen a bunch of companies that, where VCs have discovered, and in VC, by the way, they don't have any incentive to discover wrongdoing. Because let's say there's something going on. You know, I've invested a bunch of money in the company and I'm trying to wait for the next round when I'll get an exit.

Deepak: And I find out this you know, the founder is siphoning money because his wife's brother has a HR company, which is supposedly saying getting [00:49:00] recruitment commissions, but people are getting direct resumes in the company. And they're diverting those direct resumes through this HR company so that the HR company can make a 10 percent commission.

Deepak: And they've made like. 20 or 50 or 70 crores. And you suddenly discover this. And then you find out only because the GST inspector comes and says, the 70 crores you paid, nobody paid, nobody has recorded GST on this. And you're like, oh my God. But why have you paid the 70 crores? Oh, to this recruitment company.

Deepak: But wait, wait, didn't we get these resumes directly? Yes, we did. Why are we paying this 70 crores again? Don't ask. Well, you fire the CEO and you do something like that. But then what do you do now? You know what? The VC is like, let's put this under the carpet because next round I'll get out before the news goes out.

Deepak: So in many cases, the VC don't even have the incentive to report the frauds that are happening inside. But when it gets so bad that they have to report it, that's when we get to know. So that's why we so that's one case will be filed about some founder. One founder has said, we have 2000 workshops [00:50:00] connected.

Deepak: It turns out he has just done a Google search for all the workshops and listed them as his customers. So, you know, then you're like, wait, wait, I funded you based on some Google search. Yeah, sorry. But you know, you, you're like, okay, that means all the valuation was wrong. But you can't do anything about it.

Deepak: And somebody is going to jail or not going to jail in India. Nobody goes to jail for these things. But the, the, the sad part is these shenanigans exist and they exist in different ways. So they exist in a way that A, you may not even know or not have access to, and B, it's the fake it till you make it culture that the private industry has encouraged so far, that has kept people doing this without any retribution.

Deepak: So you find people, people who have done bad things get funded after that. Because they continue to do bad things. And I say this to the WeWork founder as well, is that what he did, a certain set of what he, what things that he did was actually detrimental. And he owned the WeTrademark when obviously we was.

Shray: I think he got paid some billions for it.

Deepak: He got paid a 500 [00:51:00] million dollars for it. Oh, okay. So, and then he went on and started something else and somebody else gave him some half a billion dollars again to fund. I'm like, excuse me, the second time? Really? You're, you're, but. You know, because the culture has been so toxic in terms of find these crazy guys and give them money

Shray: And the one they get right will make you so much money that none of these things.

Deepak: So essentially it's like, I don't know,

Shray: Almost like a lottery ticket

Deepak: Like a lottery ticket. So you're, you're, you're doing that. So the shenanigans are there.

Shray: Do you remember this example of Reliance Retail? That wasn't a shenanigan, but it was just a kind of destabilizing example of how these, it was unlisted only, I think.

Deepak: It was, I think Reliance Retail was there was a bunch of ESOPs about maybe half a percent or two percent of the company.

Shray: Which sounds very reasonable.

Deepak: So what was happening was the employees that got those ESOPs converted those ESOPs to shares and started selling them in the private market. It was trading at 1500 rupees per share.

Deepak: Now, at the same time, there was this a proposal to buy future retail by Reliance. Of course, that, that went through a massive process and maybe we should have another podcast on that at some point. But what happened [00:52:00] then was the, the, the, the equation started to slowly turn towards an understanding that Reliance had to pump in more money to Reliance Retail, which means increasing its shareholding, in order to be able to get the money to buy, you know, future retail.

Deepak: Now there's a rule in the Companies Act that says, if you're a shareholder who is asking for a special resolution to increase your shareholding, you can't vote on that resolution. Only the non promoter, non affected shareholders should vote. the remaining 3%. So obviously Reliance wanted to increase its stake in the company and they had to get permission from these guys.

Deepak: And those people are saying, you have to pay 1500 rupees per share at least. And he's like, no, I won't pay that much. It doesn't make any sense. I, I, I, the company is not as valuable as that. So they said, listen, we'll buy you guys out so that we can become a hundred percent subsidy at 300 rupees a share.

Deepak: They refused. So guess what Reliance did? Reliance said, if you refuse that, then I will not put money into Reliance retail. [00:53:00] I will create an owning entity called Reliance Retail Ventures, make it own Reliance Retail. Because I can transfer my shares to it. I'll put more money into that company and that intermediate company will own future retail.

Deepak: Now, what does this do? It says, well, you know what, there's a company between Reliance and Reliance Retail, which is called Reliance Retail Ventures. Tomorrow, if anything has to list, it will be Reliance Retail Ventures that will list, not Reliance Retail that will list. Because Reliance Retail Ventures will own future retail, will own something else, could own a bunch of other retail companies.

Deepak: Why would you list Reliance Retail? That's the parent which owns all the retail entities. So, This was a signal because people should have realized that boss, he's starting to build value one level higher. I need to get out. So the 300 rupees of share was perhaps reasonable at the time, but they said no.

Deepak: Then he went and, and did this, and they put in the money. Of course, Reliance, the, the Future Retail thing didn't work out. They eventually ended up buying everything for zero because they offered 24,000 crores for the, for the company. Amazon went and filed a case saying [00:54:00] no we own future retail.

Deepak: Reliance was like, you can't, you're a foreign company. You foreign investment in multi brand retail is not allowed. So they were like, Oh wait, I didn't know that. We're going to Singapore to get a stay order. They went to Singapore, Singapore got a stay order. They went Reliance went to the future retail, went to Supreme court in India and said, Supreme court said, Singapore guy is wrong.

Deepak: Amazon does not have a case. But by that time, it took two years for this. There was nothing left in future retail. They had lost all their stores, they had lost everything, and Amazon essentially had lost everything that they had invested in, and because Reliance Retail owned, not Reliance Retail, but Reliance, and Reliance Retail Ventures, effectively owned the leases to all of the stores in which Future Retail was operating, all those stores became Reliance Retail just by the this thing of it.

Deepak: So, the power of this was that in the end when people started to realize it, they did a special thing. They said, listen, you can't get this thousand five hundred or the, by that time, the stress had gone to some 2000 or 3000 rupees per share. [00:55:00] They said, no, you're not getting that. Who was buying that?

Deepak: Some crazy, I don't know. People were crazy. I was telling people, I wrote on Twitter also, be careful, this is not going to work in your favor.

Shray: So eventually I mean, or I guess there was some thinking that the company will do very well in the future. So these guys are very good at it. So just buy this.

Deepak: Just buy the share. And then, you know, I think there was recognize that, listen, we can't disrupt this fine. We'll give you thousand rupees as a deemed to be something as a deemed dividend and dividend has 35 percent tax. So You pay the 35% tax, you'll get some thousand rupees. I'm sorry, but that's all, that's what we wanna get.

Deepak: And they had to take it because it was a capital reduction and it was a special thing that went through NCLT and all that stuff. So they, they figured that out. People got, but if you had bought that share at 2000, you would've got thousand 400 paid 35% tax on that, and now have a two.

Deepak: You should understand that this works, these kind of things work against you against you and if it was a public company the same thing could have happened except that in a public company you have [00:56:00] protections because you have minimum 25 percent public shareholding, here it was 97 percent owned by a promoter, right?

Deepak: And then you you can't, I mean, there's a bunch of rules around what you can do and what you can't do and all that stuff.

Shray: So, okay. Point is taken. This was shenanigans. I, again no part of the world is very peaceful, but yeah, over here, it's a bit more like the wild west. Look, I'm coming back to some of the reasons you had cited for choosing to invest in the unlisted space in the first place, because I'm keep coming back to, is it worth it?

Shray: If I may say, I mean, and right now, since public markets in double your money every three years, nothing else seems worth it. You're like, what am I doing with the rest of my life? But coming back to this, it seems a large part of the rationale behind investing in these unlisted companies is that A you're just trying to help out people, trying to do a favor to a friend or just support them as they do something cool or B you're just very impressed by people or their idea and they're trying to change the world.

Shray: And again, you always want to be part of this journey, but it seems to me a lot like this is, if I may call it consumption masquerading as investment, it's like you want to do this thing to feel good and investment is the only way [00:57:00] to do it. It's like saying, okay. You probably wouldn't be foolish enough or extravagant enough to buy a 10 lakh rupee whiskey bottle, assuming these exist.

Shray: But you don't seem to have that many problems in putting 10 lakhs in some completely random startup where they have some pie in the sky idea. I mean, whatever is the case maybe. So how would you weigh in on this? I mean, should people's investments just be a form of consumption?

Deepak: You know, that's a great concept because I know people who, I don't know that many people who would buy 10 lakh ruppe whisky and drink them, but I know enough people who would buy 10 lakh rupees and show off for the next six months that whiskey, right?

Deepak: So but, or the next six years, in fact, but I mean, to be fair, I was that person. I, there was a bottle of blue label in my house, which was that's not 10 lakhs, by the way, just reminding you. But for me, it was very big at that time. So I think for seven years, I kept that bottle saying, I have a blue label bottled in my house.

Deepak: So. that was that was then, but this show off mechanism is also available in startups. I, instead of me showing off a 10 lakh reward, [00:58:00] I look, I have shares of Swiggy. I have shares of this. I have shares. So it's a show off mechanism. And coming to where you're talking about consumption, I think one level beyond consumption would be charity.

Deepak: And I think of most startup investments when you do it is mostly of that form, where you do something, but you don't expect to get anything back from it. That is purely charity, right? And if you do that, then I also think this is a better way to change the world than, than charity itself. Because charity has this, this

Shray: It's really tough to do as a family.

Deepak: It's tough to do charity in the first place because you don't know what you're, but at least here you're, you know, that let's say there's a friend and that friend is, I think business is. better than charity. Business is any day better than charity because the incentives are set to do the exact thing that you're supposed to do.

Deepak: In charity it's not necessarily so. So what I'm saying here is like say a friend starts a company to cure people of diabetes and you give him some, I give him some money. [00:59:00] I don't consider that charity, of course, it's an investment in a business, but if it doesn't do well and if it doesn't work out, at least a few people have been helped to get out of diabetes.

Deepak: And you know, that is great. There's a much better outcome than anything else that I could do. And I think that is what, in a way, if you want to serve the world, you want to improve the world, you want to change the world, maybe investing in startups is the way to do it rather than going in, finding an NGO that will plant a tree.

Deepak: Wouldn't you find a business that says, I'll make money from those trees and you plant 10, 000 trees. You don't make money, but there's still 10, 000 trees planted. So at some level, I think that business is better than charity. Instead of thinking of it as consumption, think of it as that business masquerading as.

Shray: Yeah. Okay. But a slight twist on this, the diabetes reversal thing. I'm completely on board with you. I completely get, but what if your friend was starting some random gambling company, some real money gaming company, would you still consider that it's like charity? You might be making the world a worse place, right?

Shray: And [01:00:00] helping him do so.

Deepak: Totally agree with you. And I think if it were that, then I would be chasing it for the money because Once you decide to chase money, there's no morals involved. People buy ITC. They don't think as ITC.

Shray: I think you're one of them.

Deepak: At some point I was, and I'm sure I am because I buy the index at some level and therefore I have ITC.

Deepak: But I don't think of myself as even worse off because ITC products are killing people. I mean, I don't think of it as a moral problem. I'm, I just want to make money off of ITC. I don't care. So once you're getting to that point where this gambling money thing, company is making a lot of money, you don't care about the downtrend social impact.

Deepak: I won't do it for charity. I won't invest in a gambling company for charity. I'll invest it purely for the money. So it was, it had that, but I'll, I'll give you another example of where you might own a company. It might, not do well. And suddenly there may be a tail end thing, which suddenly gives you a lot of money.

Deepak: This happened in my family where we owned a delisted share. Delisted is equal to unlisted. So it was listed at some point, it was delisted. We owned it. It was there in our portfolio for a long time. we [01:01:00] thought it's zero. And suddenly we get a call. Mom gets a check in a fairly large number. Saying that we have liquidated this company and therefore, you know, you're getting so much.

Deepak: We had no idea that company was worth so much in the first place. It turns out it was a promoter company of the Max Group. The Max Group was going through a restructuring and, you know, this thing happened. So this tail risk elements can come in certain cases. Tail, not tail risk, this is a tail reward. I don't know what it is, but it can come in some cases.

Deepak: I would say that there's a very low chance in startups, unless that startup owns a patent and it's gone bust, but the patent still exists in the company and somebody comes and says, I want that patent, I'll pay a million dollars for it. Suddenly you get this big amount of money. So it's possible, but unlikely.

Deepak: So, but this is some tail thing that you can think of.

Shray: Okay, fair. Coming back to then the money angle. Can you sort of help me understand the profile of the person for whom these liquid investments kind of make sense? Is it only for the filthy rich or the rich and liquid? Because as you know, it's not enough to have say tens of millions of dollars in unlisted stock.

Shray: You [01:02:00] also need to have liquidity to be able to make these investments. So who is this good for in that sense?

Deepak: So you know, the, the thing, I'll, I'll divide into four type of categories. The first would be the individual who wants to show off. It's because it's nowadays a resume building exercise is saying almost no LinkedIn profile is it.

Deepak: Invested in Swiggy early and all that stuff. You know, it's almost like that. So when you're in the show off zone, it doesn't matter. So that's why the individual wouldn't. Another would be the individuals who want to help a friend. They want to help. They want this thing. There, there, there are very few, but nowadays increasing number of people who say, I'll do pre IPO shares.

Deepak: Pre IPO, just before it goes IPO, I will invest and therefore it'll go IPO and then boom, boom, boom. And that boom, boom, boom happens in, in, in. It could work. It could work. But unless you bought OYO shares thinking that it was going to go IPO in 2021, which it didn't, in 2022, which it didn't.

Shray: Wait, has it gone?

Deepak: is still not. Oh, okay. So it is, it is there. It is, they have filed things and taken their back things and all sorts of things have happened, but they've still not gone. So sometimes it cannot work. So if you did that, of course, but pre IPO is this big thing category of people buying it. And I think [01:03:00] that's fair.

Deepak: It's a, it's a, it's a money making exercise. So you're just speculating on IPO price pops which is a fair way to speculate. But let us say that you invested in a company early. It's also possible that a VC would come in and say, listen, you need to get out. I'll pay you 60 percent more. I'm helping a friend.

Deepak: You're getting 60% more, not a bad return for a year. I mean, you, you are there to help the friend, so, and the VC wants to buy out, that's fine. But usually this tops off the thousand extra returns you would've got. Imagine you've helped, you knew share, went and gave some money and you got some shares and some VC came and said, boss, you are out.

Deepak: I'll give you this. And now you're watching this company at $10 billion. Like, what the hell,

Deepak: man?

Shray: I could have

Shray: retired. I could have retired, but you know, that is the thing that. Would, might have happened. I don't know if it's happened in Swiggy, but I'm just saying then there are two kinds. One would be a strategic, so for instance, a hero motor corp, which decides that it wants to build an electric bike, but it has realized that there's no DNA to build an electric bike.

Shray: It can build petrol bikes, but it can't build electric bikes, which needs a new thought process right from the beginning. So it invests [01:04:00] first a hundred crores and then 300 crores into Ather. Ather is a startup company that's also raised money from other people, but Hero is one of the biggest investors. Now hero for hero, it's a strategic thing saying, listen, if this grows big, it'll be because the DNA of the people who have managed to make it big to a certain extent, if it does become big and we can take it over or we can help them in the distribution so that because we sell seven like bikes a month or some crazy number like that at that time they were, but the 7 lakh bikes a month is not something that electric vehicles will even come close to in the future, but it's possible that they sell 40,000.

Shray: I have a distribution net worth, I can help them. So it's a strategic kind of a thing that says, I will grow my business by having a stake in electric bike, which I can't build because I don't have the DNA to do so. The other one would be a strategic like what Zerodha does, where Zerodha invests in a bunch of companies in the broking space.

Shray: So they, they are a broker. Universe. So they buy a stake in a company called Sensible, [01:05:00] which does options, trading, you know, software. So it helps you understand trade options. They buy a company called Streak, which does some algorithmic trading, something, something. There's something else, something else even have a stake in Smallcase. They have a stake in a bunch of other companies. Now all these stakes are primarily are built around the capital markets. And the capital markets, if they grow. Zerodha will grow. So in that sense, it's a, it's a second level strategic saying, even if I don't make money in this company is fine, but the number of customers it will give me because these companies are trying hard will be enough to satisfy whatever money I'm actually putting in.

Shray: So it might be a greater thought process on strategic. And then, then, of course, they also have a charity bent of mind. So they've created something called a Rain Matter Foundation where they invest in startups, which have a social impact. So that's a different kind of a way, but I think investing in. Startups would probably fall under these four categories.

Shray: Individuals to show off, individuals to help a friend or do a pre IPO kind of [01:06:00] listing strategic by a company that does not know how to get into one another place or a strategic which a company wants to invest so that its pace increases in intensity going forward.

Shray: This was just occurring to me while you're saying this.

Shray: What about doing unlisted investments abroad? I mean, you're the one who just said there's more innovation in the stock markets over there. So surely there might also be more innovation in the private space as well. And you must have like dozens of like college alumni who are abroad starting companies and stuff like that.

Deepak: In fact, they're more receptive also to innovation. So the chances are that if you make a new product, they're going to accept it a lot more. But the problem is now become India. Because you earlier should be able to do LRS and just transition, but now they say that LRS should be done as an ODI.

Deepak: That means you should be able to send, you should send the money and say it's overseas direct investment. It's not a gift or a, it is not even considered so for instance, you can also listed equity and that's not called ODI, but unlisted equity, especially abroad, is not considered [01:07:00] to be called LRS anymore.

Deepak: So it has to go through this RBI thing.

Shray: I think it's still the LRS, but you have to do file it with RBI and do it every year. And it's not much fun. Also, we forgot the 20 percent TCS. So if you're trying to put in like a crore, you need 1. 2, which is really not fun. I mean, yeah.

Deepak: And you have to claim that one 20 lakhs back against the tax you would have otherwise paid, et cetera, et cetera, et cetera.

Deepak: And, you know,

Shray: And as we've horrifically discovered, not all payroll software allows for even a TCS offsetting.

Deepak: And that's, and it's only allowed now from this year, otherwise it was not even allowed. So in fact, one of the other problems is that when you do a private, and by the way, even in India, if you do an unlisted investment in your own shares, you have to declare that in your income tax statement every year.

Deepak: Otherwise, the income tax department is like, where did you get this money from? Oh, I sold these shares. Why didn't you declare them in your income tax report? Well, you know what? Maybe capital gains doesn't apply. This should just be income. Oh, wait, wait, wait. 12. 5 percent versus 45%. Are you out of your mind?

Deepak: No, but you know, that's, that's, so you should, you should be declaring this.

Shray: Okay. Coming back to [01:08:00] just unlisted in general, let's say someone has heard all this and is not dissuaded by you and thinks they can find the next either swiggy or friend with restaurant, whatever the case may be. Where should you buy these shares from?

Deepak: While I'm the kind of guy that, I'm the old uncle who's telling you everything that is wrong with something. Mm-Hmm, . But I also want to be the young uncle who's saying, once you know there's something wrong with something, it's okay, go and buy it now. You know everything that's wrong with it, go and figure it out.

Deepak: Now you can actually make a hundred x extra money as long as you know that there's risk. Right. But let's say you decide to buy it, and there are two ways you can buy it. One is the company selling it to you. Swiggy is currently doing that because Swiggy has a 390 rupees a share or whatever is going around is actually a convertible preference share, which is being offered by the company to a bunch of people.

Deepak: Now, I think that's what it is, because that's what I've been hearing. It's a primary. The primary, when you buy it, it goes to the company. So you find, you know, a banker or a broker or an intermediary who will help you get that primary. A secondary issue will be where a current shareholder sells. That may be an employee who's a friend.

Deepak: It may be a person [01:09:00] who you know or a broker may bring this person to you. You should validate who the seller is. Sometimes you can get information about a seller off of you know, even online or sometimes an advertisement. IDBI once sold NSE shares by putting a paper advertisement saying, listen, we want to sell these shares.

Deepak: The lot size is 10 crores per offer and you need to pay so much the thousand rupees or something per share. So bids start from there. So you had to mail them, send them a bid. They would do a due diligence and then send you the shares once this thing was over. So you could discover it that way. What you should not do is never buying from a website that claims to hold the shares or own the shares because tomorrow this website could be shut down and they might render those share sales invalid or you know decide that it was done illegally and all that because you're not allowed to list shares because it's unlisted if it's listed it needs to be registered with SEBI as an exchange and it's not so many of these websites that say oh we have this share for sale that share for sale you I would just say avoid unless you usually [01:10:00] know these players well.

Deepak: Second thing that you should be aware of is that tomorrow, if you're not aware of the antecedents of the seller, it has happened in one case where the seller was somehow he used some foreign foreign exchange to buy, to buy some shares at a much later date, sold those shares to this other person in Coimbatore.

Deepak: He was in Gurgaon and this person was in Coimbatore. The Coimbatore person buys these shares, pays the money And the ED comes and freezes the shares saying that that person used foreign exchange in the wrong way and it was illegal and therefore we are freezing the shares. So the money didn't come back, the shares went off, but in the end there was some kind of compromise worked out in the sense of the original guy paid up paid back the money and all that.

Deepak: But it was a pain. You have to be sure of the antecedents of the seller as well. So if you're using these portals, just don't trust them blindly. Do a little more work in the background.

Shray: You know, I have this feeling that the financial industry is good for two things. They take all your liquid money and they turn into illiquid or and try and tell you why it's worth it.

Shray: Or they find stuff you already own and convince you [01:11:00] to churn it. And these seem to be two bigger skills. So another cynical question here. Is this whole thing just a ploy for being able to charge three to five percent brokerage because you can't do that in other parts of the world anymore?

Deepak: You know, that's a great point because you do get three to five percent from almost both sides, both the seller and the buyer are willing to pay a fairly large amount of brokerage.

Deepak: And because it is, it tends to be glamorous, people buy it. But, you know, as you said, eventually financial industries end up being a lot more about deal making of this sort, right? So you help a company find a merger. They give you a finder's fee of 1%. So merger was 100 million. You suddenly get a million dollars then or, or 0. 5%. So it's, it's very, it's very good that way in terms of finding ways to join this brokerage. And typically How do I say this? The financial industry is a tinder for money. In a sense, to be able to access the seller, you need some place to be able to swipe left or swipe [01:12:00] right. And that person takes 3%.

Deepak: And the more people that build their tinders, the more people that buy their tinders. The lower the percentage that is. So if you go to the stock market, there are lots of brokers. So you're paying 10 basis points, 0. 1%, 0. 05%, sometimes zero. If you go to a private market, there are not so many buyers and not so many sellers.

Deepak: So the intermediaries have stronger tinders. And you're willing to pay that 3%. So in that sense, you have a financial market trying to push you towards this stuff and they wanted to retain the glamour. It's like if you made a fake diamond, there would be so many diamonds that nobody would want to pay a lot of money for a diamond.

Deepak: So the guys who remake the real diamonds or even if they make fake diamonds, we don't know, but they want to restrict the supply of diamonds so that you, so you know, you want to keep it glamorous. You want to keep the diamond. Forever or whatever it is, because it's it's, it's valuable for the business without that.

Deepak: There is no value.

Shray: I'll [01:13:00] just come to my last few questions. The SME market is got a lot of criticism recently, and I think you were the one person defending it. In fact, so is the SME market. Think of it. It's at looking at companies, not quite at the life stage, perhaps of unlisted, but they're a bit closer than just things listed on the NSE.

Shray: So what about this SME market? Is that a place where you can also play with no longer unlisted, but early stage companies? How is that?

Deepak: So I think a lot of companies should simply go to the SME market and list because people will give it certain valuations, which may be heady, but it's not nowhere as heady as the unlisted market.

Deepak: The unlisted market is just bonkers. AI company just raised some a billion dollars. A billion dollars. It raised 8, 000 crores. That's more than the what is that? The Bajaj whole housing finance IPO. And Bajaj housing finance has been around for the largest housing finance company in India. And this AI company comes out of the blue and raises a billion dollars.

Deepak: Raises a billion dollars. Obviously its valuation is more than that. So you're you're in a position where some of these businesses are able to [01:14:00] raise ridiculously high sums of money in the private markets. That's why they're not coming to public markets. Well, I think SME markets are better in the sense you have companies coming.

Deepak: They're raising it possibly some valuation. There's some profits, there's some this, and they can then migrate to the main board. There's a company called E2EN, you know Tarun Duhao runs the company. And he was he, when they went public, it was at some 70 rupees a share. It fell to 55 or 50 rupees per share for a while.

Deepak: And then their investors had to get out and all that. And then now it's a 2000 It really scaled up because what it does is it's competition to Amazon AWS. It's basically data centers and data centers are really picked up because India is more and more insisting that people have data centers in India.

Deepak: And these guys are another listed data center players. So you ended up with this. you know, 40x or 50x gain in the stock, which was an SME company that went up. Yes, there have been a lot of companies that don't. So in that sense, they have the same kind of death rates as unlisted companies, but they also have those magnificent movers [01:15:00] that we haven't seen in the listed space meaningfully and equivalent.

Deepak: So I would say it's a better space because there's more disclosure. You at least get accounts once in six months. It's a better space also because there is liquidity, you can sell at some price anytime. So if a price falls 90%, it isn't like your shares are locked in, you can't, you can't sell them, at least you can sell them.

Deepak: And it's better because although we've seen this, this Yamaha showroom example, where there's a Yamaha showroom with two showrooms, this thing, he was raising money, he's raising 12 crore rupees at a 19 crore Pre value, pre money valuation, which means the company was valued 19 crores for having made a 1. 5 crore profit after tax with two Yamaha showrooms. Now, making a 1. 5 crore profit after tax is not a big deal for two showrooms, 75 lakhs rupees per showroom. Don't you expect at least that much return on the capital that you put to have a showroom in the first place? Now, raising this 12 crores, obviously to put in some more showrooms in place and all that stuff.

Deepak: There was a 4, 000 crore demand for it. [01:16:00] Because it was an IPO. Now, would you blame the startup for this? Because it's not reading it as a ridiculous valuation. It's 19 of profit. It's 15 times earnings. It's not ridiculous. Less than 15 times earnings. But the fact that people bid 4000 crores for it. was supposedly a problem, but it's not a problem because when people bid today, they don't bid by giving you money.

Deepak: They just block money in their own bank account and say, I have this available in case you decide to allot me shares. So the company has to go and allot the shares. If it does see allotment, it takes the money. How much can it take? Maximum 12 crores. So if there's 4, 000 crores bid on average per person, it would be 0. 3%. So 0. 3%, that means if I put a lakh rupees, I'm expecting 300 rupees to go to this IPO, right?

Shray: Oh gosh, yeah.

Deepak: I'm blocking a lakh rupees in my account because it's there, but you don't have access to a lakh rupees. You have access to 300 bucks, even if you took it. So maybe 500 bucks, but whatever it, so this 4, 000 crores has no meaning at all.

Deepak: In fact, after that, the company's listed, and it's [01:17:00] now down 20 percent from its IPO price. Despite there being 4, 000 crores, if there was real demand worth 4, 000 crores, the stock would be in upper circuit all day. So I don't think this SME overheating is a function of people asking for too much for their companies.

Deepak: It is a function more of people bouncing on any company that's going IPO just because they think it's a bull market.

Shray: Bull market and maybe we don't have enough companies. Okay, last two. Why would a company choose to remain an unlisted or private security?

Deepak: Take Tata Sons. Does it list it? In fact, they were told that they need to get listed because they were an NBFC.

Deepak: Why were they an NBFC? Because they'd borrowed 20, 000 crores. They said, wait, wait, we have to list our company and then disclose our accounts every three months because of this. And particularly in their case, what did that happen was they were a publicly limited company. They became a privately limited company because they didn't want external shareholders, because I think the Mistrys who owned shares in Tata Sons, wanted to sell [01:18:00] their shares or pledge their shares. Tata said, no, I don't want you to pledge your shares. I don't want any external shareholders of this company. So they converted from a private, public to a private. In a private limited company, you need board permission to be able to transfer the shares.

Deepak: And the board said, we're not giving you permission. So this company was supposed to get listed because it was an NBFC, a deemed NBFC, because they had borrowed 20, 000 crores from the market. So what Tata did was they paid back 20, 000 crores to stay unlisted. So now they will not be listed. They are forcibly unlisted because they don't want to disclose and they want it to be a closed one.

Deepak: This is a perfectly fine arrangement. Nobody should force a company to be listed for any meaningful way. So the other thing would be someone like Zerodha. Zerodha in the biggest bull market when it had made so much money, it didn't choose to go for an IPO. I think they chose to stay unlisted because they don't want the crazy enhanced scrutiny that shareholders will demand of it.

Deepak: And it's been on record saying it doesn't make sense. We could, we could list at some 40 times earnings or 50 times earnings, but it doesn't make sense. We should be at 10 [01:19:00] times or 15 times earnings, which is a very nice way to say it. But I would say that this is this is an exception rather than no, but a lot of companies will, or the companies like ours, which are unlisted today, Capitalmind is, but we hope that at some point we might go listed, right?

Deepak: So we are unlisted till we get listed. and then there are a bunch of unlisted companies which are not designed to go IPO. They were designed to be sold. So the people who do startups with this funda that, Oh, Google will buy us. Oh, Facebook will buy us. And, you know, so kind of build it to that. That way.

Shray: Last question to end the conversation. If you're an individual investor who's made it all the way to the end of this, like Deepak, how much of my personal net worth or portfolio should I have in private slash unlisted securities? How would you answer that?

Deepak: You know, this is the worst part of it. And I know it's going to be depressing, but consider every rupee that you have invested in the private market.

Deepak: Is equivalent to zero, which you put five lakhs, it's worth zero, because the minute you do that, you don't expect anything back. Anything back is a bonus. And you get a [01:20:00] freedom for give freedom to the startup to go do its thing without having to think about that. Oh, I have so much money because if I think I have 10 percent of money in this startup and 2 percent of money in that startup.

Deepak: That founder is thinking, dude, I've taken one 10th of Deepak's capital. I need to somehow make money for him. I don't want him to think that. I want him to think that he needs to build his company the way he needs to build his company and not be hampered by how much of my net worth I have in his. So I tell him my net worth, you are 0 percent of my net worth.

Deepak: Because I don't consider you as part of my net worth in my balance sheet. I don't consider you a part of your net worth in anything I do. When I, when I create my, I have an Excel sheet I update every week, which tells me what my total net worth is. It's a painful process, but I do it in one hand because I like the process.

Deepak: Somehow it's with the muscle memory now that helps me understand where I am. I have never put any investment and I have investment in maybe two friends companies. I've never put any investment there that I even if I own shares for because it is simply just in my [01:21:00] mind is worth zero the minute I've invested in them.

Deepak: So I would say the amount of money you should have in such companies is zero, but let us say you're doing a pre IPO investment. Now consider this the most risky way. How much would you put in Bitcoin? Essentially, it's money that I'm willing to

Shray: Well, I think even Naval Ravikant would put 1 percent of your net worth in Bitcoin.

Deepak: So if you do that, you're putting 1% net worth in startups, where you're pre IPO, like for instance, you're saying, okay, I'll buy it now. So if my net worth is 5 crores, I'm putting 5 lakh rupees into a startup. Maybe I put 10 lakh, I mean, whatever it is, it's a, it's a, it's a sandbox that I'm willing to lose money in.

Deepak: So, If I'm willing to lose 40 lakhs, I should be able to lose 40 lakhs and play with it. That 40 lakhs would become 80 lakhs, would become 5 crore. But the bigger thing over here is because startups have such low odds of success, you need to have enough money. If you're creating it as a money making strategy, you need to have enough money to invest in maybe 30 or 40 startups so that one of them can give you that 1000x.

Deepak: If you aren't that, then, you are essentially 0 percent of net worth. [01:22:00]

Shray: Well put. Well, Deepak, thanks for that. I have to say, I do feel a lot of the backdrop of this conversation is based on now what feels like over a decade of fairly strong and robust returns in the public markets. But we don't, we don't get to choose which reality we inhabit.

Shray: This is the one. And so let's see how this conversation pans out and how bigger role private plays over the decades to come.

Deepak: No, I think really, you know, privates are the future in the sense you'll find Uber didn't come Tesla, Tesla didn't come out of any big manufacturing company. They were at some point a radical new way to think of something.

Deepak: Tomorrow you may have a radical way to not take blood and still give me my cholesterol levels.

Deepak: If somebody did that, I would be quite happy and I would be willing to fund that company just for the fact that, you know, this guy's trying. And if it's noninvasive. It can change people's lives. I can just tell them wear this device and you can read it off remotely and you can give people advice on what they should be doing.

Deepak: Of course, mostly it is like stop eating X and stop it. Why? But I

Deepak: mean, [01:23:00] in general, if you created something like this, I think the privates would would work fantastically. I think privates will change our lives and you should invest in them, but you should understand that this is not an investing thought process. It is more a change the world and I'm giving somebody some money.

Deepak: Maybe it doesn't change the world and it goes to zero. So it is more you know, a business investment that should be worth in your mind zero as soon as you invest so that you can reap the massive benefits of it if they come and feel it like a bonus, but you don't expect that you will get that return.

Deepak: That's all.

Shray: Point well taken. Thanks, Deepak.