Disclosure: MoneyOnMobile is a client of Daily Fintech Advisers. I am not a financial adviser, please do your own diligence before investing ($MOMT).
MoneyOnMobile is part of the biggest megatrend – the emergence of billions into a global middle class – that we have covered a lot on Daily Fintech. The shorthand for this is usually the “next billion”, which seeks answer to the basic question “if the West has about one billion middle class consumers today, where will the next billion come from?”
MoneyOnMobil has the key to that next billion. MoneyOnMobil is not some concept level startup. The company’s revenues are growing like a weed, they are close to profitability and they are positively impacting the daily lives of millions of people. For earlier coverage on DailyFintech that describes this next billion thesis, please go here.
Yet despite such real traction in a massive market, the total market capitalisation of MoneyOnMobie is less than what a hot ICO raises in seconds based on nothing more than a “Minimal Viable White Paper”.
This post reflects on what that tells us about the state of Capital Markets and Innovation Capital in the bright early days of 2018. Specifically we reflect on a little known corner of the Capital Markets known as OTC (Over The Counter). Stephen Kann who literally wrote the book on this subject (”MicroCap Magic Why The Biggest Returns Are In The Stocks You’ve Never Heard Of”) liked one microcap company so much that in February 2017 Stephen resigned his investment banking position, invested his own money and joined MoneyOnMobile as VP, Corporate Development.
OTC – the unknown intersection between ICO and IPO
Quick word association for our ADD brains – if OTC makes you think of boiler room operations from the 1980s you are not alone. Think Wolf Of Wall Street. In todays hyper-speed digitized boiler room operations known as ICO that use modern tools such as YouTube, Facebook and Twitter, the idea of a telephone-based boiler room seems almost quaintly retro.
Since the days of 1980s boiler room operations, the OTC markets have been much more strictly regulated. If you want to do a pump and dump today you would be crazy to use the OTC markets; the global, unregulated ICO market is much better suited to such an operation.
However, OTC has still not lost that bad boy reputation. The reputation of OTC is still as bad as an ICO, but without the media glamour. OTC is the unknown intersection between ICO and IPO:
- Like ICO: OTC is permissionless investing. You don’t need to prove that you are already rich (“accredited investor”). You just use your normal brokerage account to buy and sell.
- Like IPO: you get real economic beneficial interest and regulatory protection. You no longer need to write “invest” in quotes. You get a share of the company aka a share of future profits.
Long Term Investing Is So Dated – and so profitable
Which brings us to another bit of news before tired old 2017 handed over to baby 2018 – the launch of the Long Term Stock Exchange (LTSE).
The LTSE launch is driven by fact that in the days of High Frequency Trading (HFT) we sadly also need to write “invest” in quotes when talking/writing about public, regulated stock markets.
In our HFT driven markets, the definition of long term investor is somebody who holds the stock for more than 1 second.
One reason why ICOs, for all their obvious faults, got traction is that the traditional capital markets are so obviously broken. The old idea of investing in growth companies at the right price to get a share of future profits has gone to private equity markets (aka a private permissioned market where only accredited investors can play and the processes are highly analog – don’t lose your fax machine). LTSE is a great initiative, but this excellent discussion thread on Hacker News describes some of the issues and how LTSE could be gamed.
Tweaking a rule, which is what LTSE is doing, does not change behaviour. What changes behaviour is people making a lot of money and others wanting to emulate them. That used to mean emulating investors such as Warren Buffet and Peter Lynch, finding great companies at reasonable prices (ie a pricing mismatch) and waiting for the rest of the market to understand that pricing mismatch.
The reality today is that 75% of stock market trades are done by computers in what is known as High Frequency Trading. The algorithms look at things like words in a speech by Bernanke and sentiment expressed by day traders on Twitter. It is much simpler to trade whole markets through ETFs than try to find individual stocks. The Efficient Market Hypothesis says that what Buffet and Lynch (and many others) did is impossible. When theory collides with reality, maybe the theory is wrong – occasionally.
Supply and demand is a golden rule that is never repealed. If few investors are looking at individual public stocks, the opportunities (aka a pricing mismatch) increase.
When the Efficient Market Hypothesis (EMH) was accepted wisdom, the assumption was that the only way to profitably invest in individual companies was via private equity. This is where Buffet/Lynch style investing, getting to know a company and buying shares with an expectation of a return some years later, moved. Private equity (from VC to LBO) is where the old fashioned analysis of company fundamentals takes place. The problem in the private equity markets is the Public Private Valuation Inversion.
Public Private Valuation Inversion
We first covered this subject in September 2016. The inversion is when private companies are valued higher (on paper at least) than public companies. In the past, public company valuations were higher than private company valuations of a very simple reason – liquidity. This is even enshrined into tax law; there is a liquidity discount for private companies.
One golden rule that you can count on is reversion to mean. At some point this Public Private Valuation Inversion will end. “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” (Ben Graham quote). The reason for the inversion is simple – there is no shorting in the private markets. If I am raising money for a private company I can choose a high valuation. An investor can simply pass on the opportunity to invest, but the investor cannot profit from my inflated expectation by shorting the stock. Shorting enables price discovery.
When the Crypto Markets get acquainted with reality
The lack of shorting also explains why the Crypto Markets have been able to avoid much contact with reality.
We see this in one cryptocurrency that can be shorted – Bitcoin. Since the CME introduced Bitcoin Futures trading, the price has behaved a lot more like a normal asset. Altcoins that cannot be shorted can only go up – until they hit that Wile E Coyote moment.
Telling a complex story when nobody is listening
If “investing” is done by HFT machines located within an exchange data centre using algos created by programmers to exploit some micro second data arbitrage, who do you talk to about a a complex story that combines:
- How the unbanked billions actually live their daily lives
- The digitisation of India and how it differs from China
- Mobile payments using both smartphones and feature phones
- The merchant acquisition business model translated into mobile payments
- The US OTC markets and the evolution of Capital Markets
Telling that complex story is what Daily Fintech Advisers was retained to help with. We got involved because we believe that the company is a great success story that very few people knew about. Millions of unbanked consumers in India use MoneyOnMobile every day. They know about the company, but those millions of unbanked consumers have almost no voice in the global media and investing world.
Now that the company has raised the capital needed to grow, more people will become familiar with their exciting story.
Links for more research
For more about MoneyOnMobile on Daily Fintech:
For more about Fintech in India on Daily Fintech:
(Or just search on Daily Fintech for keyword India for a lot more).
You can reach out directly to discuss our advisory services by sending an email to julia at dailyfintech dot com
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