Crypto Scare: Is the Hype Settling Down?

by Sandeep Kumar

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Crypto Volatility Index (CVI) hit a near one-year high of 127.03 on May 12th. The value of Coinbase, a big bitcoin exchange, has plummeted. A cryptocurrency that advertised itself as a reliable medium of exchange has gone bankrupt. A drop in cryptocurrency values has wiped away more than $300 Bn. The decline in cryptocurrencies is part of a broader shift away from riskier assets, which has been fueled by rising interest rates, inflation, and economic uncertainty resulting from Russia’s invasion of Ukraine. These reasons have exacerbated a “pandemic hangover” that began when life in the United States began to return to normal, damaging the stock values of companies like Zoom and Netflix, which profited during the lockdowns. However, crypto’s collapse is more severe than the stock market’s overall decline. While the S&P 500 has lost 18% this year, the price of Bitcoin has plunged 40% in the same time. Bitcoin has dropped 20% in the last five days alone, compared to a 5% drop in the S&P 500. Let us have a look at the kind of impact the crypto slump is creating on various stakeholders.

How the fall of TerraUSD and Luna has created panic?

The crypto shock occurred primarily after the sudden crash of the stable coin TerraUSD and Luna token. For the past six months, investors bought UST in order to profit from Anchor, a borrowing and lending platform which offered a 20% yield to anyone who bought UST and lent it to the protocol. The idea was criticized as it was likened to a Ponzi scheme which would not be successful. Karma hit the founder, Do Kwon, hard enough who is known for calling out critics as “poor”. Former Terra employees and retail investors in the crypto are holding the Kwon responsible for the losses. While he is still optimistic about his plans to revive Terra, Kwon is facing some major backlash in the form of lawsuits, fines and penalties.

Since May 10th, when TerraUSD and Luna began to show indications of difficulty, cryptocurrencies used by South Korean gaming firms for in-game purchases and trading have experienced erratic trading. As of then, C2X, which formerly used TerraUSD as its main platform thanks to a collaboration with Terraform Labs, the firm behind TerraUSD, which is now depegged from the US dollar, was trading at roughly 1,000 won. According to industry officials, game firms with products that include virtual coins and other blockchain functionality are still on high alert due to the recent collapse of the TerraUSD and Luna cryptocurrencies.

Wemix, a cryptocurrency run by Wemade Co., the maker of the play-to-earn game “MIR4 Global,” dropped by 28 percent during the TerraUSD fiasco before recovering back to the 2,700 won level on May 16th. MBX, Netmarble Corp’s virtual currency, has also plummeted by more than 80% to roughly 11,000 won, compared to around 64,000 won on May 6. Klaytn, a blockchain platform established by internet behemoth Kakao Corp., was also down to roughly 500 won, down from over 650 won on May 10th. Companies are keeping a close eye on the newest developments and concerns in the Bitcoin market in general since a loss of user and investor confidence might jeopardize the gaming industry’s Blockchain ecosystem, which many companies have already extensively invested in. Several crypto exchanges including Coinbase, Binance, Coinswitch Kuber, CoinDCX, even temporarily delisted Luna coin.

Sector euphoria that fueled the NFT boom has given way to more pessimistic conditions, forcing the mostly speculative NFT market to face reality. NonFungible, an NFT data business, stated that transaction volume was down 47 percent in Q1 2022 compared to the previous quarter. The figures are even more dramatic when looking at daily average sales, which fell by 92 percent between September 2021 and April 2022. Such challenges are far from insurmountable. For an NFT market that has been weak on value proposition but strong on hype, a washout was always going to happen. This data will be seen by critics of NFTs as the beginning of the end for projects that have been marked by over-promises, rug pull scams, and flash over substance. A reduction in speculation is more likely to refocus entrepreneurs on adding clear value to digital assets. A more clearly defined use case with a highly motivated and well-capitalized stakeholder to assist drive forward development is required to propel innovation forward.

What to expect in the longer run?

The fall of USDT has reflected poorly over the entire stable coin industry. Developers created functional and safe algorithmic in order to make it less susceptible to government oversight and more resistant to inflation than fiat-backed stable coins. However, they have lost their peg and failed. Some crypto analyst even suggest that the idea of algorithmic stable coins will now be put to rest. On the other hand, despite the volatility in the crypto industry since the beginning of 2022, private equity and venture capital investment into the crypto and Web3 space have been optimistic. The recent shocker has led Terra’s major investors to decide whether to help bail the project out or pull back and escape. While Lightspeed Venture Partners, one of the investors of Luna token, is planning to double down specifically in infrastructure, DeFi and emerging use cases, there is a possibility that the DeFi hype may now calm down. Until economic growth and corporate earnings forecasts are altered, there will be a sluggish flow of fresh money into equities, commodities, bonds or cryptocurrency markets in the coming months.

The arising concerns due to the crashing crypto market have been drawing attention to the regulation of cryptocurrencies. From USA to India, public officials are calling out the need for a regulatory framework to guard against the volatility risks of crypto. The US Treasury Secretary Janet Yellen has called for stable coin regulations to mitigate the risks, ensuring there are no gaps in the regulation. In India, experts are in a process to lay out tax policies for cryptocurrencies. However, naysayers believe that it could disturb the huge potential that the crypto industry brings in terms of intersection of blockchain, machine learning and job creation. Lack of clarity on policies is discouraging innovation in the sector and forcing job seekers to look for opportunities outside India where there are more crypto friendly policies.

A wake-up call for investors

There is no doubt that crypto is a volatile space. The crypto market has survived all this due to the underlying premise that the blockchain is a powerful tool that can change the way the next generation of digital products is built. However, some investors try to make quick money out of these volatile markets. Several people lost their entire life savings through crypto investments. It is advised that investors should research the projects, the technology and promoters before investing in tokens and not just follow returns blindly. Shocks like the recent one will act as a wake-up call and likely make investors mature. As per Sidharth Sogani, founder and CEO of Crebaco Global, a rating, research and intelligence firm focused on blockchain and crypto, more trouble is yet to come. He mentions that as for the crypto market is concerned, we might see a further down or a sideways movement for the next three to six months before it enters the bull market again.

So next time you make any investment decision, especially in a volatile market like crypto, be sure to be patient and do extensive research instead of running after quick returns.

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This article has been co-authored by Sayan Mitra and Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

Valuation Reset: Who are the gainers and losers?

by Sandeep Kumar

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From a year of record funding to valuation check, how have things changed?

For any startup, raising funds is an inevitable part of the journey, and it highly depends on how the company is valued. VC funding sky-rocketed in 2021 with over $643 Bn going into global venture investment. This marked a 92% growth compared to the previous year. Consequently, we witnessed more than 10 new unicorns being minted each week on an average, adding around $1.8 Tn in value.

The amount of funds that went to higher-risk, early-stage startups was notable in 2021 as it witnessed almost 100% YoY growth in early-stage funding, with $201 Bn in about 8,000 startups. However, the good times do not seem to continue in 2022. Often, startups overvalue themselves in order to raise funds without giving up much of their equity. This may be detrimental in the long run — in case the company struggles to meet the expectations of the investors, it will have to raise funds at a lower valuation in the future rounds. Moreover, external factors like geopolitical tensions, inflation, underperforming IPOs and public markets have also affected the startup valuations. Through this article, we try to understand the different reasons for the decline in valuations and the kind of impact it could have on investors and startups.

Source: Crunchbase

Valuation reset for overvalued tech unicorns

After the hyped market in 2021, venture capitalists are now renegotiating their deals. As reported by WSJ, Tiger Global Management which has been one of the most prolific startup investors is renegotiating the investments for several companies, reducing the valuations by more than 20%. Manhattan Venture Partners also noted a nearly 10% plunge in the stock purchases of certain private companies in the first month of 2022. Some high-growth startups are even scaling back the funding rounds or delaying their IPOs that could value them lower than expected.

Let’s have a look at some recent examples where startups have been revalued by the investors or have themselves reset their valuations.

  • Philadelphia-based growth startup, Dbt Labs Inc, scaled back its funding round that valued it at around $4 Bn instead of the initially negotiated $6 Bn.
  • Fidelity, which has an investment in fintech giant Stripe, recently marked down the value of the company by over 9%.
  • The delivery giant, Instacart slashed its valuation by about 40%, valuing the company at $24 Bn down from its earlier valuation of $39 Bn.
  • Startups like OYO and Pharmeasy, who were preparing to go public are now considering downsizing their IPO valuations considering the market conditions.

The effect of tech sell-offs in public market is also visible in the private secondary market as there is a heightened interest in selling shares at a discounted price, typically 10% — 30% lower than the last quarter of 2021. With fewer IPOs, shareholders are looking for liquidity solutions in the secondary market, ready to sell their shares at a discount.

VC pull-back and a shift in focus

As market correction started happening in the public markets, its effects have been trickled down to the private market as well. As a result of huge tech sell-offs and dropping valuations in the public market, many VC firms have tightened their grip on startup funding as well. Investors are rechecking the startups’ valuation at a lower level to account for the pressure on the public peers. Firms like Tiger Global Management and D1 Capital have pulled back from investing in late-stage startups. The growth stage and later-stage funding seem to be stagnated. At times like these, some startups may be in desperate need of raising funds, so they will have to lower down their valuation expectations to be able to raise some cash. Meanwhile, startups that had raised huge rounds last year are being advised to use their funds wisely and prepare for even worse times.

The plunging tech stocks facilitated by inflationary concerns and rising interest expectations added to the pessimistic lending behaviour. The stocks of public companies, which typically guide the valuation of startups, saw a decline in valuation. By the end of January, companies that went public last year were down an average of 32.6% since their listings. Less proven companies performed even worse. Not only did the drop hold back investors, but also delayed the startups from going ahead with the IPO. The reset in startup valuations was well predicted, but what is surprising is that historically there has always been a long lag in the private market’s reaction to a public market slowdown, now it’s much faster.

However, things are not the same for all the sectors. While consumer businesses have taken more brunt of the pullback, companies dealing with blockchain, cryptocurrency, and cybersecurity have continued to attract VC interest. Despite the tight funding hand, investors’ focus has been shifted to seed and early-stage startups. The risk may be high with early startups and they are far away from taking a meaningful exit, but they allow investors to write smaller checks that could still give them some returns.

How is the valuation reset going to impact the stakeholders?

A drop in valuations is a double-edged sword. Investors may welcome the dip in valuation as it would mean that they would get new deals at a meaningfully lower value. VCs would love to offer lower prices on new deals, but also want their existing portfolio companies to be marked up in subsequent rounds. There is also a significant chance that the public companies, that guide startup valuations, will normalize back to the mean of the last couple of years. Consequently, VCs have tightened their lending capacity and shifted their focus to early-stage startups. Many startups had raised huge amounts for the early rounds, which raised the expectations and hence the valuation of the company. Now, slashing their valuation in order to raise funds would mean that startups will have to dilute a greater chunk of their equity.

The kind of valuation reset that we have started to witness was much needed after all the craziness in 2021. However, whether this is just a minor correction or has a long-term impact is difficult to determine now and we will have to wait and see at least till Q2 or Q3 of this year to understand where this goes. Till then, startups need to utilize their available cash prudently.

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This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

How will the Cybersecurity Sector Rise in a Digitized World?

by Sandeep Kumar

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Every now and then we keep hearing about instances of cyber threats and attacks wiping out millions of dollars from various organizations. The cases have risen as several companies went completely digital, especially post-pandemic. 2021 saw a record rise in cybercrime with ransomware attacks rising by 151%. As businesses realize the importance of digital security, they are taking steps to keep their digital stack secured, making cyber resilience a top business priority. As per a survey by WEF, nearly two-thirds of businesses find it difficult to deal with cybersecurity incidents due to a lack of skills. Hence, they need to rely on partnerships with security firms to secure their business from such threats. Cybersecurity is a massive market with over $150 Bn in annual spending. It has led to a positive outlook toward cybersecurity startups. As a result, VCs are betting their money on security startups. 2021 is considered a record-breaking year for the sector as cybersecurity startups raised over $29 Bn in venture capital, outpacing the previous two years combined.

Source: 2022 Cybersecurity Almanac | Momentum Cyber

VC activity and trends

VC investments in cybersecurity have grown gradually over the years. In 2021, VC firms had a really big appetite for cybersecurity as the deal volume crossed $29 Bn, seeing a YoY growth of over 136%. With this, the size of the funding rounds has also increased for security startups, as 82 financing rounds grabbed a deal of more than $100 Mn.

As the startups in the sector are attracting VC money, there has been significant growth in the number of unicorns. About 30 cybersecurity startups achieved the unicorn status last year, with a few of them achieving the mark in just a few years of their inception. For instance, Orca Security, which was founded in 2019, raised $550 Mn in October at a valuation of $1.8 Bn. Wiz, a cloud security provider which was founded in 2020, is now valued at $6 Bn!

According to Momentum Cyber, cloud security has been the favourite segment to receive financing with a total of $4.3 Bn, followed by identity and access management receiving $3.4 Bn in funding, and endpoint security with $2.8 Bn. Geographically, the majority of the cybersecurity startups that received funding, securing over $17.4 Bn, belong to the U.S. followed by Israel (as per Crunchbase data).

Source: 2022 Cybersecurity Almanac | Momentum Cyber

Cybersecurity investment trend forecast

Based on the current momentum and growing threat landscape, the cybersecurity sector could see an even bigger year in 2022. This year, cybersecurity startups could see a market opportunity in the following areas, thereby drawing investors’ interest.

 Cryptocurrency

The crypto market is booming across the world. However, the area is also prone to growing amounts of cyberattacks. Most recently, Axie Infinity was a victim of one of the biggest crypto heists worth over $600 Mn. There are multiple cases like these, hence crypto security platforms (like Fireblocks) are expected to see investors’ focus. According to the Managing Director at Insight Partners, areas within crypto security, such as coin monitoring will see a critical focus. It is expected that large payment companies and even traditional market exchanges will carefully look at the space around security.

 Compliance and Auditing

2022 is likely to see a move towards “shifting left of compliance”, which intends to find errors early in software delivery for compliance and third-party audits. This also includes smart contract security audits. Some startups already working in this space include CertiK, Certora, and OpenZeppelin.

 Web3 and Metaverse

A large number of startups are exploring the web3 and metaverse space. This means startups involved in securing user identity and ownership could attract VC money. Identity management and authentication have already been popular in 2021, however, startups looking beyond and into the future of the internet could win big.

How to spot promising early-stage cybersecurity startups?

The number of cybersecurity unicorns and new startups in the sector is multiplying. As many startups are attracting VCs and raising funds at higher valuations, it is important to spot promising startups early-on to get higher returns.

YL Ventures, an America-Israeli VC firm specializing in early-stage cybersecurity investments, suggests some benchmarks that you can look out for. Some of the early-stage startups backed by YL Ventures include Orca Security, Enso Security, Grip Security, Piiano, Valence, and Eureka.

 Initial Revenue:

Series A companies with $500k in ARR attract strong investors. Best startups in the sector manage to reach the $500k benchmark in less than 18 months of operation. From this level, top-performing startups can reach $1 Mn in 18–24 months, which largely depends on the company’s ability to get relevant customers.

 Average Contract Value:

Contrary to founders’ concern, Average Contract Value (ACV) is rather a misleading point of comparison as cybersecurity goods and services, along with their business models, sales motions, and customer profiles, are far too divergent when compared across the industry. However, despite the divergence, it is expected that growth-oriented companies can improve their ACV over time as the company develops additional features and improves their ability to secure large enterprise customers.

 Initial Paying Customers:

On average, successful US-based cybersecurity startups will have closed their first payment within 12 months of their seed round. A company should aim to secure at least one paying customer one full year from initial funding. As per YL Ventures, at around the 18-month mark, a startup should aim for at least 10 paying customers. However, security startups in traditional and heavily regulated sectors may have a smaller number of contracts. They should instead focus on the size of the contract.

 Hiring:

On average, successful startups will have a go-to-market (GTM) executive within the first year of securing seed funding. Apart from this, successful startups tend to have about 25 full-time employees by the 18-month mark, and the number doubles at around two years.

Cybersecurity’s demand on rise

The number of cyber threats is growing in current times, and they are not expected to decline in the near future. It is expected that over the next five years, global cybercrime costs will be rising by 15% per annum, and is estimated to reach $10.5 Tn by 2025. As businesses have made a shift towards a digitized economy, they need to protect themselves from such malicious attacks. Security companies are building themselves continuously with the necessity to deal with the present and possible threats. Contrary to the horizontal approach which focuses on enterprise applications, cybersecurity has now been focusing on the vertical approach so that specific pain points of each industry can be addressed.

The global spending on cybersecurity products and services is estimated to reach $1.75 Tn between 2021 and 2025. This number suggests the huge TAM potential that the industry holds in ensuring cyber safety. As the security concern comes to the forefront in business discussions, the cybersecurity bubble is going to rise and is not expected to burst any time soon.

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This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

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Crypto Scare: Is the Hype Settling Down?

by Sandeep Kumar

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Crypto Volatility Index (CVI) hit a near one-year high of 127.03 on May 12th. The value of Coinbase, a big bitcoin exchange, has plummeted. A cryptocurrency that advertised itself as a reliable medium of exchange has gone bankrupt. A drop in cryptocurrency values has wiped away more than $300 Bn. The decline in cryptocurrencies is part of a broader shift away from riskier assets, which has been fueled by rising interest rates, inflation, and economic uncertainty resulting from Russia’s invasion of Ukraine. These reasons have exacerbated a “pandemic hangover” that began when life in the United States began to return to normal, damaging the stock values of companies like Zoom and Netflix, which profited during the lockdowns. However, crypto’s collapse is more severe than the stock market’s overall decline. While the S&P 500 has lost 18% this year, the price of Bitcoin has plunged 40% in the same time. Bitcoin has dropped 20% in the last five days alone, compared to a 5% drop in the S&P 500. Let us have a look at the kind of impact the crypto slump is creating on various stakeholders.

How the fall of TerraUSD and Luna has created panic?

The crypto shock occurred primarily after the sudden crash of the stable coin TerraUSD and Luna token. For the past six months, investors bought UST in order to profit from Anchor, a borrowing and lending platform which offered a 20% yield to anyone who bought UST and lent it to the protocol. The idea was criticized as it was likened to a Ponzi scheme which would not be successful. Karma hit the founder, Do Kwon, hard enough who is known for calling out critics as “poor”. Former Terra employees and retail investors in the crypto are holding the Kwon responsible for the losses. While he is still optimistic about his plans to revive Terra, Kwon is facing some major backlash in the form of lawsuits, fines and penalties.

Since May 10th, when TerraUSD and Luna began to show indications of difficulty, cryptocurrencies used by South Korean gaming firms for in-game purchases and trading have experienced erratic trading. As of then, C2X, which formerly used TerraUSD as its main platform thanks to a collaboration with Terraform Labs, the firm behind TerraUSD, which is now depegged from the US dollar, was trading at roughly 1,000 won. According to industry officials, game firms with products that include virtual coins and other blockchain functionality are still on high alert due to the recent collapse of the TerraUSD and Luna cryptocurrencies.

Wemix, a cryptocurrency run by Wemade Co., the maker of the play-to-earn game “MIR4 Global,” dropped by 28 percent during the TerraUSD fiasco before recovering back to the 2,700 won level on May 16th. MBX, Netmarble Corp’s virtual currency, has also plummeted by more than 80% to roughly 11,000 won, compared to around 64,000 won on May 6. Klaytn, a blockchain platform established by internet behemoth Kakao Corp., was also down to roughly 500 won, down from over 650 won on May 10th. Companies are keeping a close eye on the newest developments and concerns in the Bitcoin market in general since a loss of user and investor confidence might jeopardize the gaming industry’s Blockchain ecosystem, which many companies have already extensively invested in. Several crypto exchanges including Coinbase, Binance, Coinswitch Kuber, CoinDCX, even temporarily delisted Luna coin.

Sector euphoria that fueled the NFT boom has given way to more pessimistic conditions, forcing the mostly speculative NFT market to face reality. NonFungible, an NFT data business, stated that transaction volume was down 47 percent in Q1 2022 compared to the previous quarter. The figures are even more dramatic when looking at daily average sales, which fell by 92 percent between September 2021 and April 2022. Such challenges are far from insurmountable. For an NFT market that has been weak on value proposition but strong on hype, a washout was always going to happen. This data will be seen by critics of NFTs as the beginning of the end for projects that have been marked by over-promises, rug pull scams, and flash over substance. A reduction in speculation is more likely to refocus entrepreneurs on adding clear value to digital assets. A more clearly defined use case with a highly motivated and well-capitalized stakeholder to assist drive forward development is required to propel innovation forward.

What to expect in the longer run?

The fall of USDT has reflected poorly over the entire stable coin industry. Developers created functional and safe algorithmic in order to make it less susceptible to government oversight and more resistant to inflation than fiat-backed stable coins. However, they have lost their peg and failed. Some crypto analyst even suggest that the idea of algorithmic stable coins will now be put to rest. On the other hand, despite the volatility in the crypto industry since the beginning of 2022, private equity and venture capital investment into the crypto and Web3 space have been optimistic. The recent shocker has led Terra’s major investors to decide whether to help bail the project out or pull back and escape. While Lightspeed Venture Partners, one of the investors of Luna token, is planning to double down specifically in infrastructure, DeFi and emerging use cases, there is a possibility that the DeFi hype may now calm down. Until economic growth and corporate earnings forecasts are altered, there will be a sluggish flow of fresh money into equities, commodities, bonds or cryptocurrency markets in the coming months.

The arising concerns due to the crashing crypto market have been drawing attention to the regulation of cryptocurrencies. From USA to India, public officials are calling out the need for a regulatory framework to guard against the volatility risks of crypto. The US Treasury Secretary Janet Yellen has called for stable coin regulations to mitigate the risks, ensuring there are no gaps in the regulation. In India, experts are in a process to lay out tax policies for cryptocurrencies. However, naysayers believe that it could disturb the huge potential that the crypto industry brings in terms of intersection of blockchain, machine learning and job creation. Lack of clarity on policies is discouraging innovation in the sector and forcing job seekers to look for opportunities outside India where there are more crypto friendly policies.

A wake-up call for investors

There is no doubt that crypto is a volatile space. The crypto market has survived all this due to the underlying premise that the blockchain is a powerful tool that can change the way the next generation of digital products is built. However, some investors try to make quick money out of these volatile markets. Several people lost their entire life savings through crypto investments. It is advised that investors should research the projects, the technology and promoters before investing in tokens and not just follow returns blindly. Shocks like the recent one will act as a wake-up call and likely make investors mature. As per Sidharth Sogani, founder and CEO of Crebaco Global, a rating, research and intelligence firm focused on blockchain and crypto, more trouble is yet to come. He mentions that as for the crypto market is concerned, we might see a further down or a sideways movement for the next three to six months before it enters the bull market again.

So next time you make any investment decision, especially in a volatile market like crypto, be sure to be patient and do extensive research instead of running after quick returns.

– – – – – 

This article has been co-authored by Sayan Mitra and Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

Will GoTo IPO be an encore of Grab & Bukalapak?

by Sandeep Kumar

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GoTo, the largest technology group in Indonesia which was formed in 2021 as a result of a merger between ride-hailing giant Go-Jek and the e-commerce firm Tokopedia, is all set to go public on the Indonesia Stock Exchange (IDX). The company aims to raise over $1.1 Bn. The price range for the IPO is set between IDR 316–346 per share, which could give an estimated market capitalisation of about $29 Bn. It is anticipated that the IPO will be one of the biggest milestones in the region for an internet company. However, this is considered to be a bold move, especially in times when most stock markets are facing turbulence.

Looking at the fate of one of the highly anticipated tech stocks of 2021, Grab, which is facing a continuous downfall, we try to see whether GoTo will follow a similar path?

GoTo Snapshots

GoTo’s Financials — Is the valuation justified?

GoTo Group provides a unique ecosystem that combines the need for on-demand, e-commerce, and financial services under a single umbrella through its Gojek, Tokopedia, GoTo Financial platforms. Given the broad range of services offered, GoTo’s ecosystem contributed to more than 2% of Indonesia’s GDP by addressing the needs of about two-thirds of the country’s household consumption.

Source: GoTo

With Pro-forma orders of approximately 2 billion in the 12-months ended 30 September 2021, the company has earned GTV 28.8 Bn during the period. As per the company’s reports, its total addressable market (TAM) in Indonesia is expected to grow significantly by 2025. Despite having a gross revenue of about $1 Bn on the year ending September 2021, GoTo is yet to achieve profitability. With the reported data, GoTo’s EV/Revenue multiple is estimated to be around 28. While its valuation is less than its competitor Grab’s valuation at the time of its IPO, there is no denying fact that GoTo is still highly overvalued. GoTo Group must learn from the tragic post-IPO performance of other tech companies so as to ensure stable results.

How are other Southeast Asian tech companies performing post-IPO?

GoTo’s IPO is sought to be one of the biggest IPO in Indonesia this year. The decision to go public at this time is surely a bold move as most of the financial markets across the globe suffer due to the Ukrainian crisis, along with sharp sell-offs in tech stocks and expectations of rising interest rates. Moreover, the performance of GoTo’s peers in Southeast Asia like Grab, Bukalapak, post-IPO have been disappointing. As a result, some investors are now contemplating GoTo’s prospects.

GoTo’s Singapore-based rival, Grab’s debut on the NASDAQ witnessed an immediate slump after a record SPAC which valued the company close to $40 Bn. Despite its huge market presence, the company still struggles to make profits. Grab’s shares have hit a low this month as the company reported an annual loss of about $3.6 Bn. As we mentioned in our previous article, Grab had highly overestimated its valuation and hence the decline was meant to be.

Another Indonesian e-commerce startup, Bukalapak had a great start on the IDX, soaring 25% on its debut. While the company was a big hit in the Indonesian stock market raising $1.5 Bn, these moments were short-lived as it started to dip a few days after the IPO. The company has now lost more than 74% of its value since its public listing. Singapore-based Sea Ltd, on the contrary, soared after its IPO in 2017 but has seen a decline in recent months. From an all-time high of USD 372.70 per share to its share price recorded at 93.70 (as of 15th March 2022), it has seen a decline of 74.85%.

Will GoTo shares see a similar fate?

The favourable Indonesian stock market is making the stakeholders hopeful of GoTo’s decision to go public in such turbulent times. With some of the existing shareholders agreeing on an 8-month lockup period, the IPO won’t see any sale of shares from existing owners. According to the prospectus, the company also plans on offering about a 10% stake sale outside of the domestic market. However, the dual listing will take time and will happen only after analysing the market dynamics once it becomes public.

It is very bold of GoTo to opt for public listing in times like these when tech stocks are facing sharp sell-offs. Additionally, high valuations with lacking profits may not turn out in favour of the company in the long run, as seen in the case of Grab. While GoTo stock may see a fine start on the IDX, the company’s valuation might be disturbed, as it goes public. Although the extent of variation is difficult to determine right now, it is still a risky bet.

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This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

The Metaverse Fad: Will the trend sustain in the future?

by Sandeep Kumar

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Today’s digital era is making several advancements and one such on-going development that is creating a buzz these days is metaverse. While there exists no perfect definition of the concept of metaverse as it is still emerging, it can be best described as seamless convergence of physical and digital lives, which creates a unified, virtual community where we can work, play, relax, socialize, or engage in commercial transactions.

As the concept of metaverse is developing and moving closer towards reality, . This includes Epic Games’ $1 Bn round being in the lead, other significant investments include funds raised by The Sandbox, Mythical Games, Niantic, among others. Even big tech players are placing their bets in the future of the digital world. The term ‘metaverse’ particularly gained popularity among the public after the social media giant, Facebook rebranded itself as ‘Meta’ to put focus on its strategy to build in the direction of metaverse. .

How different industry segments are growing in the virtual world?

Expected to build over a trillion-dollar economy, businesses across different industries are exploring opportunities in the metaverse space. The global gaming market is projected to reach over $218 Bn by 2023, with global player base growing over 3 billion during the same period. The use of AR & VR along with in-game assets have enhanced user experiences. Further it is estimated that estimates 

, is considered to be one of the most successful metaverse player already. The company currently has over 47 million daily active users (DAUs) and monetizes its user base through sale of its virtual currency — Robux (R$). Gaming companies are investing heavily in enhancing user experience by improving gamers’ virtual identity and avatars.

. As virtual game developers monetize from sale of in-game assets, it opens the door to social commerce and retail in the metaverse. Several physical retail brands are now looking forward to enter the meta-world by setting up virtual malls and stores. The immersive experience provided by these virtual stores could end up enhancing brand’s revenues. Research by virtual store platform, Obsess, suggests that 70% of the consumers who visited a virtual store ended up buying an item.

Source: The Hustle

Brands like Walmart, Adidas, Nike, etc. are planning to set up their virtual stores and some are even purchasing virtual land, which also gives rise to the commercial realty sector on the metaverse. . With current trends, we can even expect the virtual real estate market to facilitate land credit, mortgage, rental agreements, etc. in the future.

Apart from gaming, retail and real estate, Metaverse allows immersive experiences for users across many other industry segments, including education, music, aerospace, etc. While they are still in early stage, such segments have the capacity to grow big in the future.

Source: Goldman Sachs Research

Some exciting startups in the metaverse

1. Niantic Labs

· HQ: San Francisco, California, USA

· Total Funding: $770 Mn

· Last Round: Series D

· Valuation: $9 Bn

Started as an internal startup within Google, Niantic is an augmented reality company and also the developer of games like Pokémon GO. It aims to build a real world metaverse which will use technology to improve experience of the world as it has been known for thousands of years. The popular game Pokémon GO turned out to be so successful for the company that on an average it earned over $1 Bn per year from 2016–2020 and generated over $641 Mn in H1 2021 itself. The company is working on its Lightship platform that will attempt to incorporate the real world metaverse into products like Field Trip, Ingress, and Pokémon GO. It has also partnered with companies that provide hardware like AR glasses and microprocessors, that will help them to provide an amazing user experience.

2. Sky Mavis

· HQ: Vietnam

· Total Funding: $161 Mn

· Last Round: Series B

· Valuation: $3 Bn

Sky Mavis is the producer of Axie Infinity, which is the company’s flagship game built on Ethereum. It follows a play-to-earn model, where users are rewarded through NFTs. Earlier this year, Sky Mavis released a governance token (RON) on its Ethereum sidechain Ronin, which allows users to pay for DeFi features like community governance and future utility via staking through validators to earn rewards. As per the co-founder, within a month of Ronin’s release, Axie experienced a 300% increase in monthly NFT trading volume.

3. The Sandbox

· HQ: San Francisco, California, USA

· Total Funding: $95 Mn

· Last Round: Series B

The Sandbox offers a community-driven platform where creators can monetize voxel ASSETS and gaming experiences on the blockchain. Known for its virtual real estate marketplace, the platform has been successful in getting brands like The Walking Dead, Snoop Dogg, and Atari to buy their own virtual land. With about 2 million registered users, Sandbox already has 19,000 land owners. The Sandbox is committed towards building the idea of the metaverse as a continuous shared digital space.

4. Decentraland

· HQ: Genesis City, Metaverse

· Total Funding: $26 Mn

· Last Round: Venture Round

Decentraland provides a platform which uses Ethereum blockchain, where users can buy virtual plots of lands as NFTs through MANA cryptocurrency. Decentraland is scaling fast and its user base has increased by 3,300%. The demand for virtual land on the platform is increasing, which has also resulted in the rise of its crypto token MANA, appreciating by over 4,100% over last year. Financial institutions like JP Morgan, IMA Financial Group have already set up their plots on the platform.

5. MetaMall

· HQ: London, England, United Kingdom

· Total Funding: $4.6 Mn

· Last Round: Seed

Built on the Solana Blockchain network, Metamall is a decentralized mall on the metaverse where users can socialize, trade, and carry out business interactions through an immersive experience powered by VR technology. Metamall allows users to buy virtual real estate and earn token money by leasing, staking, advertising and developing it. It features separate zones for commercial properties to set up shops, showrooms and business interactions, along with lifestyle experiences such as casinos, clubs, VR games and NFT art galleries.

6. ByondXR

· HQ: New York, USA

· Total Funding: $7.5 Mn

· Last Round: Seed

ByondXR helps brands, retailers and wholesalers to create immersive metaverse e-commerce platforms for their customers. Till now ByondXR has created virtual stores for many luxury brands, including Armani, L’Oréal, Lancôme and La Roche-Posay, as well as household giants like P&G and Target. Although the company is still at an early stage, it aims to transform the future of retail industry.

FinTech supporting the Metaverse movement

As businesses evolve themselves to operate on the metaverse, fintech can provide a bridge for both personal and business interactions, by managing finances and transactions. Financial services companies like brokers, lenders, banks are looking forward to adopt metaverse initiatives to enhance their reach. which will offer a virtual banking branch and financial education. Looking at the limitless opportunities in this industry,  It is believed that for financial services, decentralized finance (DeFi) collateral management will come into play, which would be managed by decentralized autonomous organizations (DAO) rather than traditional finance companies.In the foreseeable future, we can expect more businesses trying to make practices of managing financial transactions supplied by fintech solutions similar to real life.

What the future holds?

In the long run, the aim of metaverse is to make it interoperable. What currently exists is the Web 2.0 version of the metaverse, where the users are restricted as they operate within a confined space as the companies collect huge amounts of user data for their innovation and enhancement. . This may take a while to achieve with the on-going debates around the credibility of Web 3.0. However, going forward we expect that apart from large-scale platforms, several companies will transform and evolve their business models in order to operate within the Metaverse.

– – – – – 

This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

SPACs as Alternative Investment: A Critical Review

by Sandeep Kumar

 

The present SPAC ecosystem

Why are companies getting involved in the SPAC craze?

         Data Souse: SPACInsider

Downsides of going Public via SPAC

         Data Souse: SPACInsider

What Impact Do SPACs have on Private Equity?

Future Outlook

Will the SPAC boom stay?

 

 

Flourishing ESOPs in Indian Startups: How can employees make the best of this opportunity

by Sandeep Kumar

Growing Potential of Employee Stock Options in Indian Startup Landscape

This year has proved to be a great year for Indian startups and their employees. With growing valuations and better performance, a large number of companies are opting for ESOPs which has now formed an integral part of the startup compensation system. As a result, many employees were able to earn a fortune overnight.

Employee Stock Ownership Plan (ESOP) is an employee benefit plan that offers employees an option to gain an ownership interest in the company in the form of company shares that are offered to the employees at a pre-determined discounted price. ESOPs convert employees to owners by giving them an opportunity to participate in the future growth of the company by owning a part of it, but also are a great tool to motivate and retain talent.

According to KPMG’s ESOP Survey Report (2021), about 68% of the total respondents have either already implemented an ESOP plan or a similar employee benefits program or are contemplating having one. Of these companies, 72% are private companies. In India, the majority of companies offering the ESOP option to their employees belong to the software and startup sectors. As tech companies have started to realise the growth potential and benefits of the ESOP market, other industries such as Financial Services, Consumer Goods, Automobile sector, etc. have also started adopting ESOP programs for their employees.

Source: KPMG India’s ESOP Survey Report (2021)

Indian Startups on ESOP rush

Investing early on in ESOP options of start-ups can offer great returns to the employees. As of November estimates, ten leading start-ups that have been now either listed or preparing to list soon, have generated over $5 Bn returns for their employees through ESOPs.

Indian startup employees have created a fortune through their ESOP plans as the company’s valuation surged. Freshworks, an Indian SaaS startup, turned 500 of its employees into millionaires overnight as it got listed in NASDAQ this year. Almost 76% of the company’s employees own Freshwork’s shares. Looking at the fashion e-commerce brand Nykaa’s successful IPO launch, the top six employees of the company are estimated to have unlocked way more than the expected $115 Mn of value through their shareholdings and vested options. Even food delivery app, Zomato which had an ESOP pool of $745 Mn at the time of its IPO has now more than doubled in value to $1.5 Bn.

Following the trail, many Indian tech startups are now expanding their ESOP pool to retain the interests of their workers.

Recently, Meesho announced MeeSOP, an ESOP-for-all programme, that would allow all its permanent employees to have a stake in the company’s shareholding, irrespective of their position or tenure in the company. With this, the company aims to break the traditional hierarchy to make every employee an owner. This will allow all its employees to realise their personal and financial goals along with organisational goals, as employees will be able to cash in on the company’s frequent ESOP liquidation drives. Meesho is a high-growth startup, whose valuation is only expected to grow in the future. Hence, the company’s workers will be able to enjoy high gains in the future, given they exercise their vested options.

According to some sources, it is estimated that 80% of employees of the hotel aggregator platform, OYO have been granted the company’s ESOPs. As of September 2021, OYO has an ESOP pool of about 470 million shares of which 11,739 options are exercised. With its IPO coming up and an estimated post-IPO valuation of $10 Bn, it will create a total wealth of $688 Mn for its employee shareholders. Another IPO-bound company, Snapdeal has also expanded its ESOP pool by 151%, offering a total of 5,000,000 ESOP options.

While these are only some of the examples, many more startups are adopting the method to retain top talent — including PhonePe, Licious, Udaan, ShareChat, OfBusiness, Urban Company, to name a few. It is estimated that from January 2020 — July 2021, Indian startups have added $700 Mn worth of stocks. During H1 of 2021, nine companies expanded the pool to more than $170 Mn and the number is expected to have been doubled in the H2 of 2021. Looking at the fortune created by employees of companies like Freshworks and Nykaa, other startup employees also hold a chance to become Crorepatis. However, some hurdles set back workers from exercising their options.

Source: Entrackr

Problems faced by ESOP holders in exercising their ESOPs

As fascinating as they sound, exercising ESOPs is not a straightforward task. Not many employees are even aware or care about how to exercise or when to exercise ESOPs. Read more about the correct time to exercise ESOPs and tax obligations in other articles published on the same channel. As per our estimates, between 70% — 80% of vested ESOPs in unicorn and soonicorn companies go unexercised every year due to the problems faced by employees. This leads to billions of dollars of lost value for them.

Lack of understanding, delay in approvals, and lack of transparent communication from their companies are some of the reasons which hold back employees from exercising their options. Apart from this, heavy tax obligations are a major problem. While exercising ESOPs can provide massive gains to the employees, a major proportion is lost in paying the taxes. As a result, many ESOP holders across companies do not exercise their options as they do not want to pay the capital gains tax. Financing an ESOP can be a costly affair, even for the financially affluent workers.

ESOP Taxation in India

Let us understand what will be the tax implications on ESOPs for an Indian employee.

One may be liable to pay ESOPs tax on two occasions as an employee.

  • First, when the shares are allotted as a result of exercising vested options (taxed as salary income)
  • Second, when the shares are sold as a result of exercising the vested options (taxed as salary income) (taxed as capital gains).

Now let’s look at how ESOP taxation will work:

The first level of taxation (when the option is exercised):

ESOPs would be taxed as a requirement, with the value given as:

The perquisite value of an ESOP will be included in X’s salary and will be taxable in the year in which the shares are allotted. On such an amount, the employer is required to deduct TDS.

The second level of taxation (when ESOPs are sold):

When Mr. X sells the stock, he will be subject to capital gain tax, which will be calculated as follows:

Because X has held the shares for less than a year (counting from the date of allotment), the gains will be categorized as short-term capital gains and will be taxed at the standard slab rates applicable to X.

How Can ESOP Holders Grab the Opportunity?

Due to lack of clarity and huge costs involved, we have seen more than 2,000 shareholders in the past 12 months who are paper rich and cash poor and have made several wrong decisions when it comes to their private shares’ ownership. We aim to make employees aware of these opportunities and help them grab the vested opportunities. As a result, Torre Capital helps ESOP holders with funds required to exercise the stock options and pay tax obligations, with no recurring monthly interest payments, unlike a traditional loan. It is advisable to exercise stock options early so that one can reduce their tax burden and also exercise price in certain cases.

In case of a company’s liquidation event, if the firm has a successful exit (such as an IPO), you repay the principal along with a certain percentage of upside (ranging between 30% to 70%, depending upon the stage of the growth startup) back to your investors. On the flip side, we bear all risks related to performance issues with the investee company, delays in IPO/other liquidation events, or closure/bankruptcy scenarios. Your other personal assets are never at risk because it is non-recourse finance.

So, if you are an employee looking forward to exercising your ESOP options, Torre Capital can provide you with the best and the most convenient exercise and financing journey. Reach out to us at [email protected] in case you wish to know more and seek further assistance.

. . .

This article has been co-authored by Tamanna Kapur and Sayan Mitra, who is in the Research and Insights team of Torre Capital.

For exclusive information about additional research and insights by our Analysts, kindly subscribe to Torre Capital’s Blog.

If you are an investor or shareholder and want more advice about the Pre-IPO secondary markets, please feel free to reach out at [email protected] for investment advice, or register for an account at Torre Capital.

Upcoming Indian Unicorns: E-Commerce Startups with a Potential for Billion Dollar Valuation

by Sandeep Kumar

In India, around 48 startups have already made it to the unicorn club, as per CB Insights data. Well over $38.4 Bn has been raised till December 4th this year, with several of the rounds producing Indian unicorns in 2021. India will manage to get more than 100 unicorns by 2022, much earlier than the previewed estimation of 2023 reports in the past. The pace with which these companies are gaining valuations is truly remarkable. India’s pace of unicorn growth has surpassed that of China. The Indian economy is capitalizing on a host of international and national factors that are expected to create many more such companies.

We aim to identify and bring out such companies at an early stage so that the secondary’s investors can churn out greater returns. In this edition of Indian Soonicorns, we bring out some companies in the E-Commerce space that have complete potential to reach the billion-dollar mark in the future.

The Indian e-commerce industry has been on an upward growth trajectory

Let us now have a look at potential soonicorns that are likely to give high returns to their investors in the longer run.

1. Pepperfry

Rationale: Pepperfry is an online furniture and home décor shopping store. Pepperfry’s platform has expanded into both online and offline business. The company expects to be in the unicorn club soon in terms of valuation before IPO hits the market for 12 months. The total revenue increased by 27% to $33 Mn in FY20 as the brand has reached close to profitability last year, company’s focus has shifted from achieving profitability to becoming a high-growth company. Despite the intense rivalry it has experienced among all the other platforms researching this area, the online e-commerce company has managed to create a key position in the future industry’s market.

2. Freshtohome

Rationale: Freshtohome is a leader in leveraging AI-based technology and business innovation to bring a superior value proposition to customers and suppliers in a large market. The start-up, which clocked an annual recurring revenue of $85 Mn in FY20, aimed to hit $200 Mn in FY21. Freshtohome manages to sell nearly 10K tones of produce per year and has close to selling 95% qualified cohort retention and doubling every year. It has 12 lakh registered users. The pandemic helped accelerate the online purchase of meat products as consumers took to branded packaged items.

3. Trell

Rationale: Trell is a social-commerce platform for discovering lifestyles through videos in Indian Languages. It enables people to create visual collections of their lifestyle experiences. The social commerce platform has more than 100 Mn downloads and over 50 Mn monthly active users on its app. The start-up is in talks to raise $100 Mn funding, which could value the company between $600 and $800 Mn. A huge majority of people are unable to discover relevant material in their native language. Trell enters the picture at this point.

4. Magicpin

Rationale: Magicpin drives discovery to local retailers across various industries such as fashion, food & beverage, and grocery establishments. The company had a decent financial performance as it recorded a 2.6X jump in its turnover with a revenue of $28 Mn in FY20. It claims to be making $1 Bn in annual sales for its clients of 15 lakh merchants. The company haS a user base of more than 5 Mn and has expanded its footprints to around 200 cities in India. Magicpin also runs a SaaS product Orderhere.io where it helps merchants to go online in a few minutes. The product also provides logistic support through third-party logistics companies.

5. DealShare

Rationale: DealShare is an inventory-led platform that manages the supply chain and logistics in bigger cities. The start-up is in talks with new and existing investors to raise a fresh round at over $1.7 Bn valuation, which will be a more than 2.5X jump in the company’s valuation. DealShare has recorded a seven times growth YoY as its current GMV run rate is $40 Mn per annum, and is expecting top to reach $928 Mn by the year 2024. Currently, it operates in 40 cities of five states and has 20 warehouses. It will increase its footprints to 100 cities and 10 states and also build 200 warehouses by end of this year.

6. Mamaearth

Rationale: Gurugram-based startup Mamaearth is one of the most valued new-age D2C personal care brands that began with a focus on baby-care products, but has pivoted to become a personal care brand. The startup has expanded its product line by introducing 12 products at the beginning of 2020, which led to a 3.7X jump in the company’s total sales of around $66 Mn in FY21 as compared to the previous year’s $14 Mn, and is planning to double the sales by 100% this year. Its current revenue rate is around $100 Mn and is expected to have clock revenue of $265 Mn over the next three years.

India’s Potential to be a Game Changer in the E-Commerce Sector

If you are an investor interested in getting access to these and similar opportunities. Please reach out to us for understanding the investment process better. If you are a shareholder or an ESOP holder of such a company and are looking for liquidity solutions, feel free to connect with us as well. Our platform will provide you with seamless financing and investment journey. Follow us for more such updates.

. . . 

This article has been co-authored Vivek Kumar who is in the Research and Insights team of Torre Capital.

For exclusive information about additional research and insights by our Analysts, kindly subscribe to Torre Capital’s Blog.

If you are an investor or shareholder and want more advice about the Pre-IPO secondary markets, please feel free to reach out at [email protected] for investment advice, or register for an account at Torre Capital.

Road to Sustainable Investment: How Are Private Market Investors Responding to ESG Needs?

by Sandeep Kumar

What is Driving Private Market Investors into ESG Investments?

The demand for ESG-certified investments looks to be unstoppable. According to Bloomberg Intelligence research, global ESG assets under management (AUM) will surpass US$53 Tn by 2025 and will soon represent 44% of the global AUM. More than a third of all AUM in the world would have an ESG imprint in the coming future at this rate.

Two parallel developments are driving the increased usage of ESG management systems. First, rising social pressure, a shift in expectations from private enterprise, and continuous legislative reforms have raised the desire for businesses to adopt proactive environmental and societal responsibilities. Second, there is a growing realization among financial and business experts that ESG concerns may have a significant influence on corporate value, and that risk management can help organizations and their shareholders protect economic value.

ESG risk factor methods have sparked the interest of investors of all shades, and progress has been made in applying them. Some of the largest fund managers have adopted ESG on their own, realizing the advantages of incorporating risks into their investment processes. Others are reacting to the rising number of LPs asking ESG-related questions as part of their investigative work and may exert pressure on GPs to include sustainability initiatives into their investing procedures on the margin or even as a mandate to invest.

Long-Term Profit is Closely Linked to Sustainable Investment

The goal of a corporate should be to generate profits without a doubt, but it cannot be the only goal for long. Consider a company that prioritizes money over everything else with little regard for safety or environmental repercussions. What happens to a firm if a defective product is issued or an accident occurs because the business is focused on maximizing the stock price without concerns for the planet and the environment? Not only would the stock price plummet and previously avoided expenditures become due, but litigation, penalties, recalls, cleaning costs, and reputational harm would almost certainly follow, all of which might lead to bankruptcy or liquidation. In the past ten years, cyber security attacks have been a CEO’s nightmare. The next couple of decades may add ESG related concerns to that list.

According to the US SIF Foundation’s research on US Sustainable and Impact Investing Trends, US asset management companies and institutional asset owners have started employing sustainable investing techniques and analyzing the ESG problem in managing their portfolios. The sustainable industry has expanded at a CAGR of 14% over the last 25 years. Since 2012, the most significant surge has occurred.

Greenwashing Concerns

When GPs recognize that ESG is affecting LP commitment choices, they may use buzzwords in their due diligence papers to show they have accepted ESG principles, however all that talk may not be translating into implementation. As per the study of InfluenceMap, the world’s largest asset managers are failing to meet the Paris Agreement’s climate targets. More than half of climate-themed funds failed the test, while slightly over 70% of funds claiming to have ESG compliance failed. In comparison to the US and Asia, Europe is the only region that tracks ESG across the asset management business, and the framework it creates is likely to become a global standard.

Greenwashing is a practice that has drawn attention to the need for honesty in advertising in this industry. Not only are many LPs getting better at exposing asset managers’ ESG claims, but regulators are forcing asset managers to represent themselves and their plans correctly and honestly. TotalEnergies SE, Halliburton Co., Chevron Corp., and ExxonMobil Corp. were all included in climate-themed funds that were exposed to the fossil-fuel business. According to InfluenceMap, three funds dubbed “Paris aligned” and managed by UBS and Amundi SA scored -40% to -26%.

At COP26, it was widely acknowledged that considerably more money is needed for climate adaptation — that is, programs that would mitigate the expected effects of climate change throughout the world. The text of the Pact itself reflected this. The cost of implementing the necessary modifications to achieve “net zero” by 2050 is predicted to be between $100 trillion and $150 trillion. According to GFANZ, private money could provide 70% of the $32 trillion in investment required by 2030 to establish a net-zero economy by 2050. Despite their importance in completing the Paris Agreement, climate tech venture capital and ESG funds are still in their infancy. The increase of private investment removes the load on underperforming governments in terms of capital flow. More cooperation between public and private finances is essential to achieve a speedy transition.

Sector-Wise Effect of ESG

Naturally, various sorts of businesses are subjected to different ESG demands, and some of the imperatives are more intense than others. According to IHS Markit’s survey, 40% of respondents believe the energy, mining, and utilities sector would be most affected by ESG concerns in the next two years, followed by industrials and chemicals (17%) and transportation (17%).

          Source: IHS Markit

The selection of these businesses is likely influenced by the global climate change agenda, with increased environmental legislation and policy focused on companies that emit considerable amounts of carbon. “These are energy-intensive companies,” a partner at a UK private equity company explains. “Mining, for example, makes extensive use of natural resources and conventional energy.” “Companies will have to replace their cars with more fuel-efficient ones,” a UK-based asset management executive says on transportation.

COVID-19 Crisis has Aggravated Investor Focus on ESG

The ESG phenomenon is fuelled by a variety of factors, many of which have been exacerbated by the outbreak. Climate change is a major subject, with COVID-19 emphasizing the interconnectedness of the planets and the fragile link between people and nature.

J.P. Morgan polled investors from 50 global institutions, representing a total of $12.9 Tn in AUM on how they expected Covid would impact the future of ESG investing.

As a result of the COVID-19 crisis, action and knowledge of long-term sustainability concerns are expected to rise in the long run, this should be a beneficial driver for ESG. The majority (55 %) of investors polled by J.P. Morgan believe it will be a positive catalyst in the next three years. Only roughly a quarter of investors (27%) feel it will have a negative impact, while 18% believe it would have no effect.

          Source: J.P. Morgan, Tracking the ESG implications of the COVID-19 Crisis.

COVID has uncovered the costs and unfairness of inequality as social transformation accelerates. A wide spectrum of stakeholders is calling for organizations to be better operated and more responsible, especially in light of taxpayer-funded business support during the outbreak.

Are ESG Factors Shifting Investors’ Focus?

Overall, it appears that regulatory and LP forces are bringing the private markets to the brink of mainstream ESG acceptance. Some GPs are beginning to accept that the risk variables identified as part of the ESG framework are worthy components of the investing process, and reporting and monitoring systems are coming together. LPs are shifting their emphasis from public market operations to private market adoption. However, concerns about greenwashing are growing. The root of the issue is how ESG ratings, such as those provided by MSCI and Sustainalytics, are calculated. Most ratings have little to do with true corporate responsibility, contrary to what many investors believe. Instead, they assess how vulnerable a company’s economic value is to ESG Factors.

There is no doubt about the fact that due to the concerns regarding climate change and the need for sustainability, application of ESG in private markets has started to gain momentum. If you are an investor looking forward to access similar opportunities, Torre Capital offers access to top startups across the globe. Our platform provides seamless financing and investment journey. Feel free to reach out to us for understanding the investment process better.

. . .

This article has been co-authored Vivek Kumar who is in the Research and Insights team of Torre Capital.

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