Self-Deception + External Capital + Short-sightedness = Disaster

Last week, I was talking to my friend, also a co-founder of a robo-advisory start-up and he seemed to be doing reasonably good, considering that his start-up had been funded by VCs and how according to him, valuation of his business is dependent upon the growth in the number of customers, even if it meant getting them on board at a loss. His main contention was “as long as there is revenue growth, resulting in enhanced valuation, costs eventually would be taken care of”.

There are Innumerable examples wherein reliance on well-entrenched setting or ‘jugaad’, external capital, favourable regulation, over-dependence on a star-CEO has led to companies going astray.

Most of the Indian steel companies having become insolvent had the same underlying self-deceptive story to say: Deallocation of coal blocks, cheap imports eating into domestic demand, dwindling steel prices and government policy changes. There was no mention of each of their company’s increasing reliance on external capital, operating in a commoditized industry wherein the lowest price wins, cyclical nature of the industry, high capital intensity and cash flows hard to come by.

After all, a cone perfectly balanced on its apex will topple over if there is slightest defect in its symmetry; and even if there is no defect, the cone will topple in response to a “a very slight tremor, a breath of air”.

CEOs / managements of companies who are brutally honest about their mistakes are the ones who have the propensity to not only increase shareholder wealth, but also are better governed.

Jeff Bezos’s recent prediction about Amazon going bankrupt if they as a company start to focus on themselves rather than their customers clearly demonstrate customer centricity as the right metric to be used while evaluating a business, rather than revenue. Amazon’s market capitalization has increased by 40% and 25% CAGR over the last 5 years and 21 years respectively.

Rajiv Bajaj of Bajaj Auto recently admitted the launch of the 100-cc variant of the bike ‘Discover’ as the “biggest blunder” of his career as it stunted the company position. He was candid in accepting that they lost their competitive position in that segment and ended up being a ‘me too’ product, with negligible differentiation.

While I tried giving the above reasons about focusing on profitability / customers / cash flows to my friend, however I failed in my attempt; I forgot the maxim: “If you would persuade, appeal to interest and not to reason”. Since my friend had already got a stamp of approval from some of the VCs, the above rationality did not help.

Disclaimer: Please note that these are my personal views. While, I am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014, all investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action.

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