A shocking rape, alternate histories and equity investing

Recently, I met an old school friend of mine after ages. Amidst the good old banter and evergreen memories, he spoke about his past stint at Taxi For Sure and the stressful period he had to undergo during the last few months before the company finally got sold.

Curious to know more about this, I came back home and started reading about why Taxi-For-Sure had to close. That is when I chanced upon an interesting narrative on what really happened.

The Taxi-For-Sure Saga

This is the article (link) and I recommend you to read this as it holds a lot of interesting lessons for us as investors.

“This is the story of how, in just two months, Taxi for Sure went from a prospective good second bet in the taxi aggregator business in India, almost on the verge of raising $200 million, to a company that no venture capitalist would touch.”

For those who don’t have the time to go through the entire article, here is a quick gist of what happened..

Taxi for sure, a cab aggregator similar to Uber and Ola, given the first mover advantage had a strong run for almost four years till 2015, facilitating around five million cab rides. It also prided itself on “being used to beating Ola with less money“.

At that juncture, it clearly looked like Taxi For Sure was a good second bet in the taxi aggregator business in India.

But its competitor Ola, had other plans.

In an aggressive move to take market share, Ola slashed the fares for its cab rides and made it more cheaper than an auto rickshaw. Further, they also increased the driver incentives.

It’s logic was simple. The company had raised Rs.250 crore in a round of funding in July 2014 and was burning money to get more customers and drivers on its platform.

Taxi For Sure, was watching from the sidelines as Ola was losing almost Rs 200 every ride and hence thought this wouldn’t be sustainable.  This was impacting them, as both the drivers and the customers given the better financial incentives were moving towards Ola. However, Taxi For Sure expected this to be a temporary tactic from Ola.

But they were in for a rude shock, when on 28 October, Ola raised $210 million (about Rs.1,281 crore) from SoftBank and its other existing investors. In the start-up world, whenever there is a large difference between two firms, raising capital becomes very difficult for the laggard.

On 1 November, Taxi For Sure decided to take the plunge and responded with similar price cuts for customers and better incentives for drivers!

The strategy worked brilliantly and they saw a 3-4x surge in transactions immediately. However there was a catch. They were making losses of Rs.36 lakh every day. This meant they were also running short of funds and they needed to go in for the next round of funding.

They immediately started exploring the market to raise funds—around $200 million.

Things  looked  great as all the concerns on the size and scale of the Indian taxi aggregation business were put to rest, thanks to the validation via the $210 million investment in Ola by SoftBank.

The company saw interest from more than 20 investors in the US. All the due diligence was done and only two steps remained; a partnership meeting with the firm, where the entrepreneur makes a presentation to the firm’s senior team, and the final nod for investment.

So it was more or less given that they would raise the $200 mn funding.

The Blackswan Event

On 6 December night (saturday), the co-founderRaghu boarded a flight from Bengaluru to San Francisco. He had lined up almost 20+ meetings with VCs and hedge funds the following week and was pretty confident on raising the $200 mn funding

But little did he know that a black swan event on the same day would end the journey of Taxi For Sure once and for all.

Late in the evening, at about 11pm on 6 December, news broke that a Uber cab driver, Shiv Kumar Yadav had raped a 26-year-old woman passenger in Delhi.

All hell broke loose, people were angry and there were widespread rumours that all taxi aggregator firms would be banned in Delhi. Other states, too, such as Karnataka and Maharashtra, were considering a ban.

Over the next week, in an unexpected twist all the VCs backed out as they were all concerned about the possibility of a regulatory ban.

A single incident had changed the entire future of the company.

Not able to raise funds, eventually they sold out to their competitor Ola.

Thus ended the story of oversized ambition, a black swan event, a govt’s knee-jerk reaction, cash burn and over-reliance on venture capital funds.

Alternate Histories – We only witness one version of what could have happened!

Now if you really think about it, what happened to Taxi-For-Sure was just one version of several outcomes that could have actually happened.

What if that fateful rape incident didn’t happen?

What if Ola also hadn’t raised the money a few months back?

What if the government didn’t take a knee jerk decision to ban the cab aggregators?

What if some investor had still funded them?

The possibilities and “what-ifs” are many.

But now in retrospect, we only see one version of history – the version where Taxi For Sure was bought out by Ola.

This is exactly what the prolific writer Nassim Taleb refers to as alternate histories.

Let us hear it in his own words..

“One can illustrate the strange concept of alternative histories as follows. Imagine an eccentric (and bored) tycoon offering you $10 million to play Russian roulette, i.e., to put a revolver containing one bullet in the six available chambers to your head and pull the trigger. Each realization would count as one history, for a total of six possible histories of equal probabilities. Five out of these six histories would lead to enrichment; one would lead to a statistic, that is, an obituary with an embarrassing (but certainly original) cause of death.”

What does it have to do with us?

In fact a lot.

While I have tried giving evidence for why performance chasing doesn’t work here and here, it is time to understand the intuitive logic behind why past performance fails as an  indicator in investing unlike most other areas in life.

The unfortunate truth in investing is that no investment style or approach will outperform at all points in time.

This is because based on the changing market conditions, various investment styles find favor at different points in time.

So, whenever a fund is outperforming it simply means that the investment style or approach has found favor in the current market conditions.

Past performance can be a good indicator only in the case where the past market conditions remain unchanged and continue to the future. But as we all know, market conditions inevitably change and some other different style or approach will find favor. A new set of funds belonging to that particular approach will become the new group of outperformers.

Thus, to predict the future winners, the real ask is to identify the future market conditions and not the past market conditions which led to the current winners.

Unfortunately, the future market condition has several possibilities (what ifs) like our Taxi-for-sure story and no one knows, which of the market conditions will really play out and when it will play out.

Eventually one of the several market conditions will play out and a particular investment approach will find favor. In retrospect the past will always look like a single clear cut outcome which could have been easily predicted.

The current winners will be chased yet again only for us to be disappointed when market conditions inevitably change.

So, in essence there is no investment approach that is consistently capable of outperformance and also there is no investor or fund manager who has managed to switch successfully from one style to another, and always remained invested in a style that was in favour at the moment.

Oops! So what the heck do we do?

1. Identify fund managers with a clearly communicated – logical, evidence based investing approach which has worked well over the long run
2. The key reason why I emphasize on understanding the investment approach and style is because otherwise it is impossible to stick on to the fund in periods where the style is out of favor and we will perennially be in the “chase the best performing fund” trap
3. Diversify across various investment approaches or styles
   • Market cap (large, mid, small)
   • Style – Value/Quality/Growth
   • Domestic/Global

Summing it up..

Any logical and evidence based investment style would pay off over a period of time, but no investment style, however sound it is, will continuously give better returns.

And as Dan Kahneman says,

What you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. That’s the correct lesson to learn from surprises: that the world is surprising.

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