Build Vs Flip

One of the things that we contend with, apart from valuations and the long term viability of the fundamental business concept is the larger question as to what our exit time frame would be. While there have been examples of a Suzlon and a Bharti or an Infosys, most entrepreneurs, coming from the typical middle class background would like to see cash earlier than later at the end of the day and hence prefer to sell out once they are able to establish their niche and prove themselves.

Even in the Silicon VC where Indians have done so well, I tend to believe that Indians seem to have a lot more penchant for being serial entrepreneurs- viz., flip, realize value and then re-start far more than other people from other domicilities. This is of particular interest and I would ascribe this to the following reasons (may not right and I am happy to welcome suggestions).


Social milieu in India : The culture that we have all grown up is a lot different from what is there in the west. While there may be urban pockets that may look at a designation like photographer for playboy or an art director or a freelance archaeologist without too much stigma, the truth is the rest of India is obsessed with doing the right things - which means going to the US if in AP, being an engineer if in TN, or running a dhaba in the west if in Punjab. In this case, once an entrepreneur figures out that he has generated genuine value, he would rather sell and do the right thing than carry the baggage of "This guy got too greedy and hence lost his entire fortune", however so infinitesimal, the chances of that happening may be.

This is what makes people like a NRN or a Azim Premji all the more admirable. They had the gumption and courage to stick it out when it was fashionable for Indians to sell out.

Financial support & physical infrastructure in India : I used to think most of it was academic stuff till I realized this was a genuine, on the ground problem that existed till recently. Chew on these two examples:

Example # 1 : A company that I know very well which clocks $ 100 mn sales has been having problem getting a bank loan of $ 2 mn ! Why ? Simply because the company has no tangible assets which fit in to the dictionary meaning of the world "Collateral " or "fallback" as described by the bank. And the fact that our dear friend central banker wants banks to curb their lending has meant that banks are happier shaving off their exposure to sectors which are non-old economy and are happier still lending at sub-PLR rates to large business conglomerates with the right political and financial connections.

Example # 2 :A company that makes automotive components and whose products have been widely acclaimed by its customers is looking at selling out because its founders simply can't get their arms around the logistics issues that keep cropping out in shipping its products to a Dresden or a Ontario. It apparently takes them a week to get the cargo cleared from our shores vis-a-vis the 10 days' time it takes for the cargo to reach the production line from there on ! And this if you run a well-oiled machinery (pun intended !). Reasons range from overcrowding at container ports, lack of berthing space for ships, rebellious labour unions to lack of availability of continuous power. Is he justified in selling out ? Well, I guess so.


So what could be done? I am frankly frustrated at doing a rhetoric that would be more apt for a CII Chairman. It is simple, straightforward and frankly common sense for anyone who understands business.

Our societal values & intellectual horsepower:

It is a well understood fact that Indians tend to do extremely well at highly skilled, intellect driven jobs and display a fair amount of loyalty. I believe that we Indians, inspite of us not having the best of perspectives to promote macro economic thinking, tend to be extremely good at spotting new opportunities (given the fact that we are a free democracy that gives rise to debate, whether healthy or otherwise, there is no stopping the new perspectives that come in every day) and that explains the surfeit of good economists we have had over the years - Montek Singh, Raghuram Rajan, Amartya Sen and the consequent downstream rub-off it has had in the rest of us. As Amartya Sen would say, as a society we have always focussed a lot more than the others on intellectual debate, philosophy and the high think.

When you have a background like that, it becomes difficult not to peep into the future and if I were an entrepreneur, I certainly would look at the opportunity cost of continuing with the current business vis-a-vis scaling up the new opportunity from concept and would press ahead with the latter, if I were convinced that it was a magnitude different.

All of the above are made difficult from the fact these tend to be uniquely different for each entrepreneur and depend entirely on his values, perspectives and risk appetite.


I found an interesting post on this and am reproducing the relevant excerpt verbatim

• At the end of the day, it comes down to two things. First, what is your appetite for calculated risk - in finance there is a direct correlation to risk and reward. If you want the big payday, you are not going to get it investing in risk-free bonds. Secondly, it comes down to your passion. Building a company is about more than just the money as money can be fleeting - remember the bubble, it sent a lot of carpetbaggers home. The ones who have made the big payday have focused on a broader and bigger goal, building an insanely great product or service for their customers and keeping them incredibly happy. As you do the right thing for your customers, you will do right for your investors, your employees, and ultimately yourself.

Any thoughts on this, anyone ?

~Varadha

Striving for returns

This post that I read today morning made my mind go into an endless spiral of how PEs in India, in an overheated market, need to optimize returns.

While obviously the space in which early stage VCs in Silicon Valley and PEs in India, who primarily invest in growth stories are completely different, at a macro level, I tend to believe they are no different.

http://willprice.blogspot.com/2007/09/portfolio-math.html



As this post would show, the higher the volatility, the more difficult it becomes to deliver even a on-par-for-the-course kind of return at a fund level. So why should this be relevant in an Indian context ? Simply because lots of growth stories that the PE fraternity tends to invest into are still at a concept or at best at a prototype level. Examples of these are organized retail of different formats, discretionary consumer expenditure, specialized technology products/backbones.

Will customers who have been used to only voice and SMS based texting bite into browsing the mobile on the net ?

I know I am going to get killed for this, but I am an old fashioned agnostic who tends to believe that it is extremely difficult for people to change their habits and think beyond the top 1/2/3 uses of a device however so strong a value it may deliver. Of course, you could call it as a case of differentiated brand building or creating a "wow" factor. Case in point being the popularity of i-Pod, notwithstanding the advent of mobiles which deliver a music/movie experience comparable with the i-Pod. Where we still seem to have a gaping hole is in terms of fresh, grounds-up thinking to deliver a desi, indianized solution that would work for the masses. Merely transplanting ideas from the West is not going to serve the purpose.

I recently had the opportunity to talk to to a PE fund in UK which has delivered sterling returns in excess of 40-50% consistently over the last decade or so - this in a market, which is developed, in an economy that is trudging along amidst stiff competition. The secret sauce - they have NEVER lost money on an investment. Every single investment of theirs has delivered at least a 2-3 x over a 4-5 year exit and of course, they have had the 8-10x's as well. The points they tend to focus on for delivering stable, predictable returns for the long haul tend to be intutitive :

- Focus on below the radar niches : Broad themes which even your grandmother can identify do not cut ice. Can we look at mannequin suppliers to organized retailers if there is a retail boom ? Or may be a temping company ?
- Stay contrarian to popular sentiments :If everyone is running after the glamorous, flavour of the month themes, is there some fellow in hinterland crying out for attention ? May be there are value picks to be had over there
- Focus on undervalued companies - Never ride a wave, create your own. The best picks are hard nosed, straight laced entrepreneurs who have been relentlessly focussed on creating their own space in this world. For them, their business is not economics, it is passion - it is a labour of love.
- Sell when you've realized your due - If you think your company is up 5x - 10 x based on fundamentals, then sell. Never wait for the sector/theme to become hot and hope for a 40x because by the time you get time to react and start to sell, the 40x may just become 4x. Greed causes doom !

Makes one wonder when we are going to see a shakeout in India and see the winners emerge - can't wait for the moment to happen ! For with every ebb of a business cycle, there are lessons to be learnt for both the winners and more importantly and painfully, for the losers.

~Varadha

Back in black

Not so long ago I read this article in BusinessWorld that throws light on the black side.


While I must say, BusinessWorld deserves full credit for having got out something on an area which no one dares to touch, the article at its very best was academic and was threw as much light as a pencil light does in a dark, deep coal mine.

Needless to say, this is one thing that slips away, quite modestly and rather uncanningly from the view of millions of salaried middle class, all of whom are content servicing their EMIs to the Government in the form of direct taxes even before their money sees daylight.

It certainly is not surprising that no Government, State or Central, Federal or otherwise, even wants to speak about this. While P. Chidambaram talks about increasing the tax net, this hardly seems to find a mention any where. To top it all, we have an atrocious Cash Withdrawal Tax which is predicated on the fundamental hypothesis that an insignificant fee would give clues to the trail and hopefully (this is wistful thinking at its very best) act as a barricade for origination of cash hardly seems to yield results that anyone would be proud of.

One of the downsides of India being a democracy is that a vicious yet comfortable cycle has been created that allows for bureaucrats, politicans and business men to co-exist by paying the others in the symbiosis a mere fraction of what they would have to pay if they were to walk the line. So, what can be done ? Any thoughts on this ?

Seriesly funding..

Of late, there have been a surfeit of proposals floating around in the market it seems like the interest of the promoters is only play the "greater fools" game, viz., raise Series A at x, raise series B at 5x and Series C at 10x and hopefully divest some stake along the way and fulfil your dreams.

Companies that have a handful of revenues expecting valuations by the bucketful. Of late, I tend to believe that with so much money sloshing around and the eyes of the world on India has let to a new breed of entrepreneur - the one who flips and then sells.

The trouble is it is not very easy to distinguish these from the rest - infact, with the experience we have had, it is the fellow who goes about doing his job as a labour of love, for passion, for the conviction he has, who never surfaces to the point where he can be fished out.

The flippers, on the other hand, are loud, bite more than they can chew and most statements from them are always forward looking. Case in point being everyone and anyone who has any product that is used by a customer talks boldly of opening 1000 stores and getting to Rs. 100xxxx (as many X's as you would like) by 2010.

Needless to say, they are suave, sophisticated, talk the right language and can bowl you over during the intial meeting if you cannot get down to details. And they always talk about how it is only "now" that they have started to get past all the constraints that constricted growth and how once this money comes in, they are going to see a rocket launch (forget hockey sticks, they are passe in India).

Any thoughts on how one identifies these from the rest of the tribe ? Any cues, signs to look out for ?

~Varadha

India onward - whither goes thou ?

As someone who seems to relish every single minute of the job that I have, I have always wondered if I should let out some of the random thoughts that crawl out of my mind. Thus the reason for the blog.

I hope to make this simple and interesting rather than the usual rhetorics/soliloquy that most blogs tend to be.


Hello world