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