Unbound Rationality

The post below is a reproduction of my article published in Indian School of Business’ magazine launched in December 2010 at the ISB’s annual Private Equity conclave.

Since 2007 I have putting my thoughts on our Capital Markets across, through various forums and time and again I have been humbled by the market. Hence, this time around I smartly (atleast that’s what I would tend to believe) chose to share my insights on Private Equity & Venture investments in India. None of what I say in this article forms the ground rule but just my observations over the last 1.5 years I have spent at Radiant Capital analyzing opportunities spanning multiple sectors & stages.

In the recent past we have seen a flurry of new funds coming up in the market, largely started by top managers of established funds, who chose to do it on their own. As I write this article there are almost 400 -500 PE & VC funds in India with significant dry powder. Though largely a nascent market with very little proof that Private equity actually works in India, this is an alarming situation to be in from the industry stand-point. What shall follow in all earnestness is increasing competition for few quality deals, shortening of analysis & diligence cycles, higher valuations and lower returns. It might or might not play out as I say, but what one needs to pay attention is the quality of deal flow & sustainability of returns sans the ‘greater fool theory’.

Though all of us agree that India has a great macro and demographic story to its advantage, however PE is as much a micro evaluation as a macro call. As an example, in last six months I have seen more than 10 companies with solar lantern or other solar products for rural markets in India. We all know the macro opportunity here; however, what needs to be validated is if these companies can establish a distribution and service network that is economically sustainable. Each one of them claim to have developed the product that is better than their competitors, but what I find missing is a strategy to take these products to markets without involving any Government or large Philanthropic organization. There is no doubt in my mind that some of these are great companies and will go on to achieve their targets. But the ones who come up with an innovative business model to solve this problem are most likely to succeed.

Another key aspect that requires significant attention is Corporate Governance and transparency. Given that the vast majority of businesses in India are family owned or very small, these two areas are often proclaimed about but missing in practice. Case in point are retail jewellery players in India a number of whom have either raised money from PE firms or are looking to. All of us know how our moms, sisters and wives shop for jewellery and how cash transactions are rampant in this business. Given the nature of business, it becomes nearly impossible for any investor to induce significant amount in such firms without the comfort and confidence of high level of transparency and trust.

Innovation in products, services or business models is something which is rare to find in my experience. Though every next day we keep hearing about new services or companies that offer us deals online, location based services or information, online shopping experience all of them are in true sense a clone of a successful western world counterpart. However, this is not a fool proof methodology for a successful venture. If not evaluated for local environment and localized to the need of markets the model could be disastrous. So on one hand Investors face low level of innovative businesses on other a number of me too kind of players crowding a yet to be proven market space. Examples are numerous clones of ‘Groupon’ that have come into existence in last six months.

Whether its buying a shirt, opening a bank account or hiring someone - each transaction involves a set of individuals that define the final outcome. Last 6 months have seen giants like Google and Twitter tweaking things around to have the right people in charge for the incremental growth. Time will tell if Larry Page and Jack Dorsey are the right guys for respective firms, but the principle that individuals define (drive) the outcomes is clearly evident in both the cases. So how important is it for a young startup to have the right set of people at helm?

Most startups strive to satisfy an unmet need. Some create entirely new services or products while others improve upon existing offerings. No matter whatever a startup does it requires (or is dependent upon) more than a few individuals to execute its vision and fulfill its purpose of being. As the startup moves from a paper idea to execution stage, there are twists and turns in the way - including but not limited to possible changes in product, strategy, market conditions and risks. More often than not it is during these exciting times that most founders are tested for cohesiveness, adaption, agility, flexibility and purpose of being together.

During the initial stages of a startup most likely its the individual with the ‘Vision and Idea’ who drives things. Founders who

1. complement, trust and back each other, 
2. are open to change and adapt, 
3. have fun together,
4. have at-least equally compelling purpose for being together

are more likely to succeed than others. Where most startups fail is the percolation of vision amongst its core team and identifying the real stakes (stake isn’t material only) for all individuals in the core.

Time and again I have observed individuals failing their firms because the firms were not able to identify correctly the purpose that drives an individual to be a part of the team. The purpose governs the stake an individual has in success or failure of the firm, which in turn governs individuals’ behavior.

It is widely assumed and followed that processes and incentives tend to take care of individuals’ behavior. I am ardent believer in the whole “Process” methodology, but its the people who make the processes’ work rather the other way round. The whole theory of finding & evaluating the purpose of an individual is more relevant for a startup given its lean structure. As pointed out by Jim Collins - “Right People on the Bus” and one way of doing that is identifying and aligning the “Purpose” of your each individual in your team.

As a VC I get to meet fairly large number of entrepreneurs - seasoned and first time entrepreneurs on a regular basis. Its mind boggling and intriguing to meet 20-something, care-free, calm and passionate individuals adamant to change things for better. When raw and unstructured minds think out of bounds, disruptive changes happen and that is what attracts me to entrepreneurship. Having been in the fray myself, I made my fair share of mistakes and fortunately learnt from them (at-least I’d tend to think so).

Unfortunately, just like most industries as more & more venture capital headlines make their way to WSJ expectations and focus of a lot of young entrepreneurs shift. Rather than focusing on strategic and operational issues their focus shifts to valuation and first funding round.

To give you a flavor of things, I have been advising a start-up (for obvious reasons we’ll keep things anonymous) since sometime. The idea & service the guys have been working on is niche, scalable and presents huge opportunity. With little competition, smart and energetic team everything seems alright about the future. Lately, the founder felt the need for further investments to scale up and rightly so we started discussions about the modalities.

Few meetings later, I realized how his ambitions grew to levels that were unsustainable and unwarranted at this stage. True, my last post was about being unreasonable but it was being unreasonable for a different set of reasons and not for altering business plans that would enable raising a predetermined amount of funds at a decided valuation. Every subsequent meeting thereafter resulted in him asking me one question - “What about my first funding round?”

Worried about the distraction and illusion that had crept into the kids mind, I advised him to go around shopping at his terms. Few days later, since he couldn’t find a taker he came up with a toned down version of the expectations but still not ready to bite the reality. The game is still going upon but I sat down and thought about my own experience as an entrepreneur. When I set out on my entrepreneurship journey, the goal was never to bounce off the venture or raise hefty amounts of capital. Instead we focused on creating a lean model that capitalized on human capital rather than financial capital.

My learning has been that entrepreneurship is very similar to rafting in uncharted waters. You need to be agile and prepared to tackle issues yourself and focus on business (strategy, operations and execution) rather than waiting for someone (VC, Advisor) to steer your ship. The moment, one takes eyes of the task at hand, the water might get better off you. So all you young would be entrepreneurs only board the ship if you are willing to take control of things and enjoy the roller coaster ride.

“The reasonable man adapts himself to the world; the unreasonable one persists in adapting the world to himself. Therefore, all progress depends on the unreasonable man.” - George Bernard Shaw.

One of my frequent and unsurprising observation interacting with a number of entrepreneurs is their ability to visualize what other’s can’t and articulate it as ‘Vision’. In doing so an entrepreneur may seem unreasonable at the outset. But invariably this unreasonable attitude is what the entrepreneurs draw strength and motivation from.

Around us we see and appreciate successful results of this unreasonable trait exhibited. Who could have imagined household usage of Microsoft’s Kinect, Apple’s (rather Steve Job’s) masterpiece iPod ~ iPhone and now iPad - 20 years ago? What could possibly explain the decision by Infosys’ founders to start an outsourcing business at a time when it took 6 months to get a telephone, and people required permissions to import computers in India? Traveling back in time the ‘Vision of all these wonderful people and the decision to work towards it seem utterly unreasonable.

Agreed that more often than not number of entrepreneurs, their ideas and firms fall flat. There are various reasons for that including inability to find appropriate teams and architect execution. Any of these reasons don’t reflect upon the trait in discussion here.

Time and again I have confronted myself with the question - “Is entrepreneurship an individual trait?” . My answer arguably is “Yes” and it is when a group of unreasonable individuals come together history is made.

Interesting title for the first post on this new blog. In many ways it sets the tone for things to come and serves the purpose for which this blog exists - a culmination of creative thoughts from different spheres of life to help us all pursue our passions. In my case its entrepreneurship.

The inspiration for this post came looking at one man in the post match celebrations of India’s world cup triumph. It all started on 5 November 1987 when a heart broken 14 year old kid dreamt of lifting the all coveted trophy. Over the years he not only surpassed every benchmark of individual brilliance but carried hopes of a billion people to near perfection.

Records came, went by and one glory after other was conquered. So much so that all bestowed him as the greatest cricketer of all time. Soon the man had no competition but himself. Such have been his accomplishments that he moved beyond confines of cricket and is perhaps the only cricketer to be in league of greatest Sportsperson ever.

Yet the man kept going - not for an individual record but a coveted dream of 24years that eluded him after 21 years of unimaginable brilliance. Finally when the dream came true the man cried. I couldn’t resist remembering one of my most cherished scene of modern cinema from the movie Pursuit of Happyness - “This part of my life, this little part, is called happiness”.

Okay, now that I have bored you enough and constructed the premise lets move on. So here are my questions for all of us

1. Do you have a dream that you cherish so much?
2. Would You give 24 years of your life to pursue and achieve it (even when you know you might not attain it at all)?

Did the questions sound entrepreneurial? Pretty much, there is so much that an entrepreneur could learn from this great man. More than anything the dedication, passion, joy and perseverance this man embodies.

I wish I could be a fraction…….