Sanjeev Bikhchandani on IPO pricing, identifying multibaggers & corporate governance in startups

What is your advice for companies going in for IPO?
Be conservative you do not have to maximise valuation at the time of the IPO. You got to leave enough on the table for the incoming investors while at the same time not short charge the current shareholders. It is a fine dividing line, a tight rope walk but do not push the price to the limit.

What is your advice for retail investors, many of whom lost lots of money?
Yes, they have and that is unfortunate and when retail investors lose money in IPOs, that is not good karma in India. I would furthermore emphasise that be conservative in pricing when you are going out in public.

Is this the right time to go for an IPO?
There is never a time for an IPO and there is always a time to IPO. Remember when we went public, the Sensex was at 13,000 but headed north and it took us 11 months to prepare for the IPO. In those 11 months, there were many ups and downs but finally when we went public, it was 13000 and headed north. The market took the IPO well. As long as the market is stable or is headed a bit north, one can go for an IPO.

How does Sanjeev Bikhchandani identify future multibaggers?
We do not think that deeply about it. Good management, pursue a good idea, some customer traction, some natural traction in the market, that the app is getting downloads, engagements and the website is getting traffic and all this is growing without spending money on marketing. Those are all good signs.

A big problem is plaguing the private markets. From BharatPe to Trell to Lido to whatever is happening now at Sequoia Capital, they put out a blog on corporate governance. How big a problem is corporate governance in the private markets?
I am hoping it is not very big and there are just a few bad apples. There are 40,000, 50,000, 60,000 start-ups out there. The vast majority are very good people doing good things. Secondly, even the examples that you have named, nothing definite has come out yet. It is still under investigation. So I would hesitate to speculate on each individual case but I do think corporate governance is important for everyone including start-ups. It is never too early to be well governed.

But corporate governance in the private space would have to be self regulated first. Principles have to be set out by the founders?

Yes, I have said in my tweets and in the column I wrote that it starts and often ends in the founder’s head because we have seen that even in public companies in the past 10, 15, 20 years, all sorts of things have come out even though they had independent directors, auditors, audit committees, Sebi supervision, quarterly filings, quarterly disbursals everything. But still things came out afterwards when the share prices tanked.

So finally, if you have a determined founder who wants to somehow bypass all these checks and balances and do something that he is hell bent to do, he will manage, he will find a way to do it. So really it starts in the founder’s head, what is inside the head, between the ears and then all the other things kick in to tell the founder, okay this is not how you do it, this is how you do it, try to avoid this and try to do it this way.

Is that part of the problem because reports have been coming in – whether it is a bogus expenditure to inflating GMVs. It all seems to be there in this crazy rush to chase valuations?
Frothy markets tend to hide a whole bunch of things, whether in the public space or the private space. It is only when the market heads south or volatility comes out that sometimes these things happen.

You have made some very pertinent points in those series of tweets. I would like to go through them. In one, you have said is good corporate governance will always command a valuation premium?
That is what is an investor once told us because when we did a couple of things that they liked, one expected investor called us up and said that “in my view, you are getting a 25% premium for corporate governance because in India there are very few companies of this calibre of governance.” That made us feel good.

How did you lay down the first principles of corporate governance here at InfoEdge?
I did not lay down any principle. We just did it.

It was work in progress, rolling?
Yes. Constant work in progress. What is important is that the top three or four people thought alike on this matter, whether it was then CEO Ambarish Raghuvanshi or Hitesh Oberoi. We all thought alike. There was no concept of taking shortcuts.

A lot of the questions are being raised right now. What are the board members doing? What are VC executives doing on the board and what are the statutory auditors doing?
The board will operate on the information that the management discloses okay and they will comment on that. Right now if somebody is hiding something, it is often very hard to find out about it because it is not being disclosed to the board, because the board is not 24×7 inside the company and doing the work and therefore the auditors exist. But they will only do a sample check. It is not a 100% check of every transaction. Which is why I am saying it starts and ends with the founders.

So what about statutory audits? How often should they be done as you grow bigger? Should they be done more often? Should you just follow what the listed companies do?
Well audits happen as per the regulations once a year, quarterly numbers are disclosed by public companies, private companies now. We are a listed company. When we invest from our balance sheets, we have to disclose quarterly to our shareholders which means that our investing companies disclose to us because we consolidate very often. Now that becomes slightly onerous for our companies but it is also good discipline and we actually make people do more than most of the venture capitalists simply because we have disclosed quarterly.

What we are also hearing these days a lot is how founders and investors have had fights. There have been angry emails. The person giving the cheque may also want to have a say. What is the best way to resolve such issues?
First of all, these things should not happen and founders must understand that taking somebody else’s money comes with onerous responsibilities. Fundamentally, you have to understand that it is not just your company alone; now it also belongs to all the other shareholders. It belongs to the employees to whom you have given ESOP and therefore it will carry all minority shareholders with you and protect their economic interest which means you have to be transparent, disclose, tell the truth, not hide, not inflate revenue, not reduce the expenses artificially and do all the good right. If you do that, most investors would be sensible enough to not get in your way.

The corollary of that should also be that the investor who gives the cheque should not think that this is my company alone.
That is absolutely correct but you see most investors cannot sit in the company and drive it. We always tell our founders, listen guys, before we give the cheque you are dependent on us, you are chasing us for money but after we give the cheque we are dependent on you because we actually have no recourse, it is not debt where you have got signals of collateral we can recover the money, we are totally dependent on you and therefore it is really important that we understand each other and working well. But we have a responsibility when we give the money to our shareholders to make sure that we are good custodians of that money. Therefore you have to be a good custodian of the money we give you and therefore we have to play ball.

Another point that you have made in the tweet was that you are very wary of allowing founders into secondaries. Why is that the case?
I am not wary. It is the alignment of interest right, it is what ICICI has told us very early on before they invested or just after they invested. I asked why there were clauses that says I could not do a secondary without their permission. I said why is this there? In a private market, if you start selling you will get your money but if we cannot sell. we will never make money and so we have to make money together. We need our return and you get wealthy when your shares are worth something. We are in this together. You cannot bail out before us. It is about alignment of interest with shareholders.

And that is something that you have followed all through?
It is something we have favoured. It is in a frothy market hard to impose especially if founders are getting offers from the investors. So, we are wary but we go with the flow.

In the last two years you may not have fallen prey to it but there was this mad rush literally for start-ups. We are hearing FOMO, term sheets being signed in 24-48 hours. How apprehensive are you about the kind of skeletons that are yet to tumble out because it would have all been at the cost of due diligence?
Due diligence is done after the term sheet. So, enough stuff would have come out in due diligence if it was there to come out. But when valuations are headed north, one may say it is okay to live with the risk. But when valuations headed south, investors suddenly became a lot more careful. What I do not want to live with is additional valuation, pulling the term sheet, renegotiating or whatever.

All these various reports are coming out from your own personal experience because you know while we hear about layoffs, we hear about mark downs the job market still seems to be doing decent, looking at your attrition numbers?
We are seeing that in Naukri. But beyond tech talent also, there is a lot of talent in very short supply. At the same time, some companies are distressed or some companies will be right sizing. They will let go of some people but those guys are finding jobs pretty quickly.

This is going to be a problem that people like you will have to live with.
It is a problem for our own hiring and now retention. But it is a good thing for Naukri on the revenue side. So it cuts both ways for us.

Will Sanjiv Bikhchandani and Hitesh Oberoi of InfoEdge hit the pause button on investments this year? Are you doing any proactive stuff for your portfolio?
We continue to invest. We remain committed to that. Early stage investing is not about this quarter or next quarter or next quarter. You are talking about 10 years or 12 years and so we do not stop investing.

But will you take proactive measures? Sequoia capital is saying that they are going to look at their portfolios?
We are constantly looking at our portfolios and naturally if markets are turning or they have turned, if capital is becoming more scarce, we work with them closely and say listen guys how do we get the profit sooner rather than later.

It is interesting times ahead for the ecosystem. Let us hope we only go from strength to strength?
Let us hope so. Even in challenging times, we will find companies coming through. Naukri was founded in 1997, we came to the 2000 meltdown because the company existed then and then came the meltdown. IndiaMart listed now, Matrimony listed now, Shaadi is doing very well, InfoEdge doing alright, MakeMyTrip doing all right. So companies that go through the down cycle, usually come out stronger.

You have seen many cycles. Is this cycle a frothy one?
This is the sixth or seventh cycle in my career. I quit my job in 1990 and since then it has been 32 years and this must be the sixth or seventh cycle. If you keep your cost low, if you are frugal, if you got a good value, prop in your product and you are creating some real value for your customers, one can go through any cycle.

So this is not even one of the more painful downcycles?
No, 2009 or when Lehman went down , that cycle was really bad.