Valuation guru Aswath Damodaran told Business Today recently that he’s of that opinion that “young companies” shouldn’t be getting bank debt and that no one should “shed tears” for companies that go down after “raising too much capital in the bad times”.
Damodaran, who teaches finance at the Stern School of Business at New York University, told India Today Group’s Global Business Editor Udayan Mukherjee that “it’s healthier for an ecosystem not to have too much money sloshing around”.
He was responding to a question about how he sees the crisis among new-age digital companies playing out amid curtailed operations, “funding winter” and not having recourse to bank debt.
“Young company should never borrow money. So, not having access to bank debt is a good thing. Banks shouldn’t be lending to young companies, because what are they going to pay it back with? So it’s true, you’re at the, you’re at the mercy of venture capitalists, which I guess is the version of private equity that plays out here. But come easy, go easy. I mean, these are companies that came out of nowhere to be worth billions of dollars. And these are companies that will lose value. So why do we shed tears about this?” said Damodaran.
His comments come at a time when firms like BYJU’S, Swiggy, Oyo are losing their valuation sheen and share prices of listed new-age tech firms like Zomato, Policybazaar, Paytm, Nykaa are well below their all-time highs.
He further said that it’s better if weakest of these companies are “shaken out of the system”.
“In the good times, you raise too much capital in the bad times, you won’t raise very much. It’s healthy for the ecosystem for the weakest of these companies to essentially be shaken out of the system. So I know it’s painful in the near term. But I think it’s healthier for an ecosystem not to have too much money sloshing around. And in my view, for a decade, we had too much risk capital funding these companies,” he said.
Damodaran further said that what transpired in 2022 in terms of global macroeconomic conditions, which resulted in a pressure on funding climate, is “what a normal risk capital market looks like”.
“What happened in 2022 was a reversal to normalcy. It wasn’t some retreat to some bad spot. It was just a reversal to what a normal risk capital market looks like. So I think in a sense, you might be shedding tears for the wrong companies, these young companies that raised too much capital went after traditional companies and regular businesses and ruined them. I mean, nobody shed tears for those disrupted companies. So why are we shedding tears to the disruptors now?”