Give it time #2

Posted on October 31, 2008 by dd

Following through on the last post…

…as Harry Cohn (1891-1958), film producer is reported to have said: “Give me two years, and I’ll make her an overnight star.”

That’s is the story of most successful businesses and people.

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Give it time

Posted on October 30, 2008 by dd

A few weeks ago, I was having a discussion with someone who was considering choosing between developing or acquiring a relatively new brand which had built a small base of business. My take was, it would take 4-5 years to begin developing a brand that is clearly identifiable, but if he had the time that would be a worthwhile investment rather than acquiring a half-baked concept.

Yesterday, in a discussion the thought popped up that a similar time-frame applies to any new business; for it to start developing its foundation, for its organisational dynamics and structures to mature, for rough edges to be discovered and managed, for the team’s common objectives to be articulated in a common language and get really internalised.

A friend also drew the parallel to Bruce Tuckman’s model (1965) of group development (Forming-Storming-Norming-Performing). These stages need to be necessarily gone through, and can only be accelerated somewhat.

So it was quite a pleasant suprise when a validation came from the philosophical side today: “It helps to remember the story of the Chinese bamboo which does not even show a shoot for the first four years. In the fifth year, however, it shoots up to a towering height. How? Because the first four years are given to building a dense network of roots that give the new plant foundation and support in soaring high. We too, unknown to ourselves, are building a solid foundation, or perhaps unbuilding a false foundation. These efforts are invisible and take time. Just keep going.” (Suma Varughese, editor-in-chief, Life Positive)

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Will the Real Businesses, Please Stand up!

Posted on October 25, 2008 by rl

While the world continues to be at the edge, coming times shall be kinder to old fashioned, “middle-class” businesses. Good ol’ profit making companies would be back in favour, solid customer relationships would be indeed an asset and committed workforce as priceless as any other time. Adding workforce would be easier and significantly cheaper, real estate rates (rentals/leases/buys) would be moving towards realistic prices too, very soon if haven’t already. Terms such as Burn Rate are losing favour; profit and positive cash flows (no matter how small) seem reassuring and for many rediscovered!

These (old fashioned) businesses may have wondered for the past decade what they have been doing wrong, why they were doing what they were. They suffered – from abusive employees, financial institutions and alumni from school or college or the neighbourhood – the talk about valuations and spectacular growth plans, while they just grew by 25% or abouts.

To those old fashioned businesses: ladies and gentlemen, please rise and take the applause for being the Real Businesses. For sticking on your path, when you saw your peers earning multiples of what you do after spending years in your enterprise, for seeing “funded” ventures poach your employees, for losing the limelight with your customers who wanted to talk to the “better funded and more visible company” over you and so on. Thank you for being there!!

While at all times new business models are needed, challenging the incumbents, let us not forget that the ‘incumbent’ was a challenger, an innovator not so long ago.

Businesses’ raison d’être is very simple and very basic and yet so many of us forget it so many times – to be able to bring that something better (faster, or cheaper, or whatever the customer believes is value) to the market and taking a (large) part of the customer’s pain away. In fact the larger the pain mitigation, the larger the reward the business can expect over its competition. In the process businesses make money, create jobs, improve processes, and improve productivities, and profits are by definition a by-product of all these factors and external market factors. And yet this simple principle eludes us many times – especially in times of bubbles, speculations, times of “hurriedness”; and we know how it all feels, for we have been there too.

These real businesses have created real surpluses – over both inflation and that part of the profit which Peter Drucker would refer to as “the cost of doing business in the future”. They have invested these surpluses in real estate when it was a little less bubbly or even otherwise. They have borrowed money at expensive credit rates & terms and have yet grown their businesses and their employee base (Some, having “mastered” their sense of enterprise to an extent and given their motivations and aspirations, attempt playing at a different stage…and scale.)

Real businesses: thank you once again for persisting, for growing at double or more of the GDP growth rates, we bow to you. For you have lasted downturns and crises of the past and come out stronger and wiser and you shall, again…

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Scale on Sale

Posted on October 24, 2008 by rl

Nearly all of us talk about scale, scale and scale for not realising that scale is but a factor of excellence. Master musicians, chefs can NOT be scaled overnight, those ordinary mortals work hard, learning and mastering tricks the hard way. Businesses used to take decades to grow to a level from where they would scale. Walmart did not build 1000’s of stores in a few years but over decades. To clarify: we’re not saying that ‘Scale’ is wrong. However, the question to ask is – do you wish to build your body the old fashioned way or on Steroids?? And a Coach and a Gym with the right equipment is also critical!

If we were to take music as a simile for business – we see bad musicians making us suffer with awful lyrics, lack of melody and yet we seem to celebrate that. Old-fashioned music and musicians are so passé, and looks and “style” matter more over talent when it comes to being the new music diva!!…many new “businesses” similarly have better presentation and articulation skills, but not better substance.

An excerpt from “Zen and the Art of Motorcycle Maintenance”  sums it up well- “You have to be awfully stylish yourself not to get sick of it once in a while. It’s the style that gets you: technological ugliness syruped over with romantic phoniness in an effort to produce beauty and profit by people who, though stylish, don’t know where to start because no one has ever told them there’s such a thing as Quality in this world and it’s real, not style. Quality isn’t something that you lay on top of subjects and objects like tinsel on a Christmas tree. Real Quality must be the source of the subjects and objects, the cone from which the tree must start”.

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“World on the Edge”

Posted on October 11, 2008 by rl

This is the cover page headline of the October 4th, 2008 issue of The Economist, showing a man looking down from the breaking edge of a cliff.

A few days ago, with some friends the conversation drifted from the state of politics to the state of markets and I commented that the Real Estate market is yet to see significant correction and painful times. The reaction from others was “that’s not possible; at best it would stay at the current levels”.

We moved to why we are where we are. My simple(istic?) answer – that excesses get countered with excesses – was met with more questions about: is India’s state because of the depreciating Rupee, where has the money gone really, etc. I confessed that am not equipped to answer on M1/M3/Money supplies anymore (and I wonder who is), but thought there are so many of us wondering why are we where we are?

Let us attempt some simple answers.

The Economist puts it well:

“….For almost a year the markets had worried about banks’ liquidity and solvency. After the bankruptcy of Lehman Brothers last month, amid confusion about whom the state would save and on what terms, they panicked. The markets for three-, six- and 12-month paper are shut, so banks must borrow even more oney overnight than usual.

“Banks used to borrow from each other at about 0.08 percentage points above official rates; on September 30th they paid more than four percentage points more. In one auction to get dollar funds overnight from the European Central Bank, banks were prepared to pay interest of 11%, five times the pre-crisis rate. Astonishingly, rates scaled these extremes even as the Federal Reserve promised $620 billion of extra funding.

“Bankers have always earned their crust by committing money for long periods and financing that with short-term deposits and borrowing. Today, that model has warped into self-parody: many of the banks’ assets are unsellable even as they have to return to the market each day to ask for lenders to vote on their survival. No wonder they are hoarding cash.

“This is why those politicians who set the interests of Main Street against those of Wall Street are so wrong. Sooner or later the money markets affect every business. Companies face higher interest charges and the fear that they may one day lose access to bank loans altogether. So they, too, hoard cash, cancelling acquisitions and investments, in order to pay down debt. Managers delay new products, leave factories unbuilt, pull the plug on loss-making divisions, and cut costs and jobs. Carmakers and other manufacturers will no longer extend credit and loans will become elusive and expensive. Consumers will suffer. Unemployment will rise. Even if the credit markets work well, the rich economies will slow as the asset-price bubble pops. If credit is choked off, that slowdown could turn into a deep recession…….”  (complete article here).

PVC’s view since July 2007 – yes no typo there, 2007 not 2008 – has been not very optimistic.

Key Issues (2006-2008):

  • Stretched Valuations since early 2006 – New listings at 3 digit/high 2 digit multiples of 2/3 years future Earnings or Mega IPOs with Zero Revenues for the next 3-5 years!!
  • Easy PIPE deals for PEs, very little money for Seed/Early Stage companies.
  • Easy Deals kill “real innovation” and foster “financial innovations” (aka excesses).
  • Unrealistic Real Estate pricing – creates and encourages overleveraging
  • Spiraling Commodity Prices- from Oil to Ore, Coffee to Copper. Trading in Commodities Futures being more profitable than existing businesses for many. The same being true for Stock Market and Real Estate as well. New Markets for diversion (not diversification) from existing business focus.

Some Recommendations (2008-2009-?):

  • Cash is King – Preserve/Get Cash, kill your burn rate.
  • If you have lots of cash, go out and start looking for companies to acquire. Consolidation’s best times are actually when the markets take a major beating.
  • Drop your IPO plans, there is no market.
  • If you are selling your company, remember Recommendation No. 1 – Cash is King.
  • Series B/C would be big challenge, prepare your company for a freeze on additional capital inflows.
  • If you do not have a (profitable) business model yet, figure it out very soon or quit.

It is difficult to predict, but we believe its going to be a long winter, and we do sincerely hope that we are wrong…..

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