DNA Money Edit: Why do PE firms keep pumping money in loss-making e-commerce ventures?

The private equity investment fraternity has a rather strange way of doing business. While herd mentality is just one aspect, the very fact that more and more investment firms keep pumping money in businesses that are not showing any signs of creating value for their investors raises concerns on their approach. One starts wondering about the tall claims about them closely evaluating the investee company, conducting thorough due diligence, seeing huge growth potential, etc.

If they can spot a winner at various stages how difficult is it to figure out if the business is really winning or losing? The approach is to make the multiples and let the other guy figure it out. What's further surprising is that the other guy (investment firm) buys into the story and makes his contribution towards building the investee company's valuations.

The recent developments around Kunal Bahl and Rohit Bansal co-founded e-marketplace firm Snapdeal clearly shows that money was mindlessly pumped into the business. A business that boasted of valuations around $7 billion is struggling to get buyers pay even $1 billion. Compare the value with all the money Snapdeal raised over the past few years and one gets a picture of the extent value erosion that's likely to happen when the deal is closed.

Despite such incidents, the investment fraternity fails to derive any learnings. This is evident from Goldman Sachs' investment of $25 million along with Accel Partners into a loss making hotel franchise chain called FabHotels. What are these investment executives really smoking?