Striking Gold – Some Risks can Pay off Brilliantly

This week was a good one for many a Flipkart Employee as they finally were able to convert their paper wealth into real wealth. While startup’s getting acquired by bigger companies is common in the United States, Mergers and Acquisitions are pretty low in number out here in India.

From Angel Funders who funded the company when it was just an idea to employees who joined late but yet early enough to earn their stripes and Esop’s in the company, this one exit is a game changer when it comes to their lifestyle and personal choices they otherwise would have tended to make.

Saurabh Mukherjea who is a well-known name in the Investment Circles in an interview with Bloomberg Quint suggested that for a comfortable retirement, Retirees need at least Rs 150 Million of corpus for generating an income of Rs 5 Million to to Rs. 10 Million.

While it’s false to equate that everyone requires such a stupendous amount of money to retire and live a comfortable life, having such a sum can really change a lot of things and give you different perspectives on how you want to spend the rest of your life.

Of course, the money didn’t drop by without most of them taking risks, some really big risks. Working in a start-up is like no other job. Taking the job early on generally means taking a salary cut for no start-up can afford market salaries and the only way they can compensate for the loss is by way of Shares.

But shares are literally pieces of paper worth a big zero if the firm doesn’t succeed in its venture. Its like the Banks that owned the Kingfisher Airline Brand as a collateral – when the company failed, the brand failed too regardless of the highs it had reached in better times.

The only way to safe retirement one is told is to save more, spend less and try and ensure that the savings earn the best possible return without having to take risks that can hurt the capital enormously.

For anyone who will be retiring in say 2050, Vanguard recommends 90% in Equities and 10% in Bonds. This is based on the belief that over time markets will provide a much higher return and given the time span remaining on the clock, the investor can take higher risks than normal.

Of course, theory is always easy, the tougher part is to actually be able to execute and be invested even 60% of one’s assets in equity for it Scares the shit out of most people who would rather play safe with a lower allocation to equities, higher allocation to bonds and Real Estate hoping things will turn out fine the time of their eventual retirement. Then again, who knows what the future holds?

One of the standouts of the Flipkart sale was Ashish Gupta who invested 10 Lakhs when Flipkart started and now stands to reap 130+ Crores on the sale.

While such opportunities will never be available for the general public at large, we do have opportunities creep up once in a while in the public markets that offer a high risk reward relationship.

I believe its Taleb who has outlined the idea of risking a small part of capital to ventures that can offer a very high return. If the venture fails, the risk to capital is small enough to not impact you on a longer term and if the return is great, it bumps up the total return of the portfolio by a solid margin.

When Elon Musk sold his stake in Zip2, much of the money went into a new high risk ventures that subsequently got merged into Paypal. In turn, when Paypal was sold, much of the money went to high risk ideas such as SpaceX and late by way of a Series A investment into Tesla (among other companies).

Of course, not all risks pay off which is why it’s still called a High Risk Venture. But unlike private markets where the risk is all or none with little or no liquidity, secondary markets offers the best of both worlds.

As Investment Advisers and Agents start crowding around the new Millionaires and Billionaires created by the Flipkart sale offering safe investments (with a nice commission inbuilt for themselves), I do hope most remember that they are there because of the risks they took, not because they turned out to play it safe.