What the IPL can teach us about Investing

If you follow cricket or the Indian Premier League ( Yes, ‘or’ is the right conjunction here), you already know that the latest season is underway.

As is the case with every other season, much of the pre-tournament hype was centered around the millions of dollars spent by teams to acquire certain players. This time around, it was Ben Stokes’ turn to become the expensive player at the auction, for the sum of Rs. 14.5 Crore ($2.1 Million).
As Dean Jones half-correctly pointed out, Ben Stokes’ price is nearly twice the salary cap of entire teams at the Big Bash League.

The rationale for this generous price tag appears solid. After all, Ben Stokes is amongst the best All-Round players in international cricket today.
However, even given the uncertainties of competitive sport, why do so many of IPL’s most expensive bets perform so poorly, and what could this teach us about investing?
Image source : Dilbert.com

Let’s start off with a look at how the players fared in IPL 2016.

Approximately Rs. 441.8 Crores (~$68 Million)were spent by franchises on building their teams that season and a total of 30285 MVP points were earned by players. This implies that, on average, franchises spent Rs.1.46 Lacs (~$2260) per MVP point earned.

This allows us to actually calculate in-match contributions of each player and evaluate investment performance.

<a href="http://www.espncricinfo.com/indian-premier-league-2016/content/story/1021917.html" data-type="tilCustomLink">Image Source</a>

The fact that Virat Kohli tops this list is hardly a surprise. A record-breaking 973 run season deserves no less.
However, does that also make Virat Kohli a great investment ? The answer might surprise you.
To earn the Rs. 14.3 crores through in-match performances, the Royal Challengers Bangalore franchise had spent Rs. 12.5 Crore on Virat Kohli for a net return of Rs. 2.3 Crore (Or an ROI of 18.4%).
Virat Kohli’s best IPL season could only yield a decent, but not winning return.
So, if not Kohli, which players actually ended up being the investments of IPL 2016 ?

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Whoa !

Except for David Warner ( who, at 5.5 Crores was much ‘cheaper’ than Virat Kohli for nearly the same output), none of the top performers make the list of top investments.

If we were to exclude David Warner as an outlier, every other top investment was priced either in the vicinity of Rs.2 Crores ( Which, in the words of Ravi Shastri, is “Peanuts”) or significantly lower.
You might even say that these players were ‘ undervalued’, making them perfect picks per Warren Buffet’s value investing philosophy.
In particular, look at no. 2 on the top investments list — Yuzvendra Chahal. His price of Rs. 10 Lacs returned an 82.6X multiple on the investment !

But this isn’t the first time “cheap” players outperformed at the IPL. In fact, it happens rather often. For example,

  • Shane Watson was bought in the second of two auctions in the inaugural IPL in 2008 for a sum of Rs.50 Lacs ($125,000) and ended up as the Player of the Tournament.
  • Shaun Marsh was purchased for his base price of Rs. 12 Lacs ($30,000) in 2008 and ended up as the highest run-getter of the season.
  • Andre Russel, no. 3 in the list of best investments of IPL 2016, finished as the Player of the Tournament in 2015, at the price of Rs. 60 Lacs ($97,000)
And which players represented the worst investments in last year’s IPL ?

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With the exception of Pawan Negi ( What might have been the rationale that appeared to justify a Rs. 8.5 Crore investment in Pawan Negi ?), each of the worst investments — David Miller, MS Dhoni, Mitchell Johnson & Suresh Raina represents a proven international star worthy of the price tag.

In fact, for all the star power in the IPL, only two teams returned a meaningfully positive return on investment in 2016, the two finalists — Sunrisers Hyderabad and Royal Challengers Bangalore.

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Would you have guessed that the ROI on Virat Kohli (18.4%) is less than the aggregate ROI on the entire RCB team (25.1%), the side Kohli plays for?
Turns out that investing in IPL player auctions is just as risky and the outcomes are( dare I say it) just as difficult to predict as VC investing.

What might the best VC investments of all time have in common with successful IPL bets ?

Lets take a look at the snapshot below:

<a href="https://twitter.com/nitinsharma1/status/837266758612430848" data-type="tilCustomLink">Image Source</a>

Each of these companies (Tencent, LinkedIn, Snapchat, WhatsApp, Google, Facebook, Juniper Networks, and Alibaba) represents an excellent investment because they all ended up as large standalone firms or acquisitions.
But more importantly, in each of these cases, the investor decided to take a leap of faith by investing early in an unproven company.
The most recent of these examples is how Lightspeed Venture Partners’ benefitted from being the first investor in Snapchat.

How much of a difference does acting early on a successful investment make?

A timeline representation of AppDynamics fund-raise journey up until its $3.6 Billion acquisition answers that question:

<a href="https://twitter.com/EquityZen/status/824259839559766016" data-type="tilCustomLink">Image Source</a>

Lightspeed yet again gets to be one of the first investors here and the value of the $5.5 Million investment ($572 Million) is greater than the appreciated value of any subsequent round at the time of the acquisition by Cisco.
And while investing early in non-consensus deals is highly risky, it probably is the one strategy that is most directly aligned with achieving outsized returns,whether in the world of startups, or professional sports.
The following extract from Jeff Bezos’ 2017 shareholder letter appears particularly relevant in this context:

“…most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being slow. Plus, either way, you need to be good at quickly recognizing and correcting bad decisions. If you’re good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure.”
Whether as investors or entrepreneurs, we must always ask ourselves if we are making enough early contrarian bets, or waiting to pick “safer” options.

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