The recent chant of regulatory protectionism has honestly left me amused and intrigued. It's surprising to see this come from some of our first-generation entrepreneurs who built fairly successful brands for themselves based on the funding they had raised and with that steered and created a market for their category. You ask what about them has caught my surprise?
It's their demand for protection from foreign competitive companies at a time when the need of the hour is not to ask the government to keep those companies away but to focus on building rock solid organisations, having the determination to stay the course, and, more importantly, having the vision to see that competition will only help the market grow. Why cry 'foul' today when the burden is switching from how much money can be raised to how strong the foundation you have built for your company is.
Just to put things in perspective, I am not an advocate of western companies entering developing markets with a one-size-fits-all approach. There is failure written all over that strategy (or rather the lack of one) from the word 'go'. What I am a firm believer of is building brands at scale, building long-term organisations with fantastic teams that believe in the product and the opportunity to grow the business, competition withstanding.
We don't see our colleagues in telecom screaming for protection from global companies and it's for all of us to see that they have prevailed, and even done better. I don't see that clarion call in the auto sector as well; in fact, many of our Indian car and bike companies have gone global. A similar case in point for the IT sector of our country: we didn’t see Infosys, Wipro, or TCS crying for protection from an IBM or Accenture because they took the competition, local and global, head-on and built sustainable businesses models that stood the test of time.
Even in the media and entertainment sector, where I spent a decade-and-a-half of my time, we have had a Zee TV that continues its winning streak in spite of global completion and players with even deeper pockets who could in some way be called market spoilers. I challenge any of those global media companies to beat the track record of Zee, which has always maintained the best ratios for Capital Employed than any of its competitors.
Till date, it ranks number one on Return on Capital Employed, whereas MNCs have squandered billions before they figured their model. Let's take a leaf out of the learnings from these sectors, each hugely successful in creating a market. Their need for international capital is obvious, but their focus has been in building a sustainable business of the future, not with protection and regulation but by being smarter, wiser, frugal and, most importantly, being quintessentially local.
Coming back to first-generation entrepreneurs who feel the "sudden" need to get regulations to protect them when they spent the better part of the last many years raising millions in funding from those very same markets, I have two pointers to share:
1) I am amazed as to how fast today's entrepreneurs start feeling okay with such rapid dilution of their shareholding. Equity is by far the most valuable asset you have when you’re building your company and yet I see it having the least value. These same entrepreneurs set out to make a ton of sacrifices, take on untold risks, face multiple failures before they taste success — only so they can feel "I am working for myself," but in the shortest period of your business cycle if you have dropped to less than 10 percent ownership of your company, then what have you really proved? Yes, I know many will say, “But do you want to be a big fish in a small pond or a small fish in a big pond?” I’m sorry that analogy is wrong and if you are using it you are only fooling yourself! Of course, as a first-generation entrepreneur you will need to dilute, but is your business model such that at the core it's really your expertise to raise unlimited sums of money versus building a sustainable business? That’s the key question each of these entrepreneurs should ask themselves.
2) Even worse is something we don't see presently, but we may soon come to realise when you are in a situation wherein you are down to 10 percent or less of your company, and you raised millions (in some cases billions) at valuations that protect the incoming investors of the value they came in with. You are the last in line if the value drops from the last or highest round ...and you know what? It may, it could, it will.… and so now comes the final test in the Circle of Life. If you finally unlock value or sell your company or list/IPO, first, all investors need to be protected for their original value. If that is so the chances of you getting zero for your 10 percent is highly probable if the value of your company now is lower than your highest fund raise value. So how does that work? You sweat and start; you then raise capital and get to be poster boy based mostly on the funds you have raised and now after the full circle of creating value for your company you land back at zero.
I know the above two points can open a Pandora’s box of criticism and many will come back saying that it's easy to say and hard to do. Having raised funds multiple times for my businesses in the past, I know one can easily say that we need the money to grow and in the first two rounds itself investors want up to 30-40 percent, so it pretty much goes south after that. To this, I would have two submissions.
First, it comes back to what I said before: what kind of a business and company are you building, and if it's not deep in innovation, strong on your own tech, and needs the time it needs to build, but instead it's all about growth and marketing spends and customers at discount, then you are stuck in some sort of a rut and you may face the above eventuality or your business does great and you too create wealth but a tenth of what you could have.
Secondly, even if we see the need to raise money for growth, you cannot go along with what most investors preach: take the money while the going is good. Excess money corrupts, encourages slack and wasteful costs and gives us a sense of power to spend without really thinking harder.
Yes, it's a tough one again, and we could find ourselves in reserve mode in our gas tank if we have just kept raising unplanned levels of funding that we do not have a real plan on how to spend. But then that's why you're an entrepreneur in the first place — to be in those hard places and think much, much more efficiently on capital and for the long haul.
My sense is that all of us as first-generation entrepreneurs have focussed too much on building companies on large fund raises, creating consumer bases on marketing spends that no Return on Investment (ROI) can ever justify, and not felt the need to take our time to build companies with strong foundations. We are saddled by the constant fear of missing the bus. We position growth for the sake of growth just to justify the next level to please investors and raise funds when we should actually be focusing on innovation and building strong technology of our own and taking our time to build businesses with strong foundations. The same global companies have done just that in their home market and that's why we are feeling the heat.
Now it is true that a company like Ola had built a comparatively strong tech platform — but for them to build a world-class platform may take 1,000 engineers, while Uber has already done that in their home base and so they may need just 50 more engineers to cater to the local market. Now that's where the hard call comes in for us as entrepreneurs. Spending the money we have worked hard to raise to insignificant levels by splurging most of it on low ROI marketing and discounting, or should we sacrifice some element of the meteoric growth we think we need and direct it towards innovation and technology and understanding the consumer, rather than buying him. Great companies take time, have a long-term view to build real value and the founder's priority does not rest in participating in the rat race of growth to raise more capital, which then creates more pressure for growth, and so the circle goes on.
Let's also face the fact that we are not a market of 1.3 billion at one price point, and will not be for another three more decades. Only with huge scaling that will spur consumption and with open doors and competition will we be able to create price points and common markets for at least half of the 1.3 billion. Think long term, innovate, invest and be future entrepreneurs with that mindset and we will not need to worry about or ask for any protection and, in fact, be the right role models for the new startup generation in India.
You may come back strong to me asking (and I stop and wonder too) if Alibaba, Baidu or a Ten Cents would be the scale they are without the tacit founder-government understanding to keep western companies out of China, or at the least ensure they never make money there? But that does not mean we need to think or be inspired by that Chinese model. India is not China — we don't want to be a China. Let's stay competitive. Let's think big, innovate and build strong teams and tech and take our time to build strong companies, and think long term. Let's be clear that we can be better than any global best and that we are proud of being the largest democracy in the Free World.