Thursday, July 16, 2015

Picking up the tabs for Europe

Read a joke on the internet yesterday; “A Greek, an Irish, a Spaniard and a German go to a pub and have a fun time… at the end of the party, the Greek, Irish and the Spaniard put up their hands for not having money and finally it was up to the German to clear up the mess”. Doesn’t sound funny right? The joke in fact is that this is the scenario that is currently running across most of Europe as it looks down the barrel of the financial crisis that has the potential to threaten every single country.

It is funny in a lot of ways that the most powerful and resilient economy in Europe today is one which has actually experienced some serious political turmoil, change of guard, partition and unification all over the last century. Germany has been subject to paying up for the wars in Europe and has seen inflation that has been just mind boggling during the Depression. In the recent past, Germany has faced the difficult balancing act of offsetting debts of a low industrialized East German economy in the 90’s. Yet again, it is Germany which is having to so a salvage – this time it is most of Europe.

So where did Europe go wrong?

Through the ages, Europe has always been a restless baby. They have fought for power and control within the bounds of the continent or its colonies. It is not uncommon that while Europe made the best out of the Industrial Revolution, the monarchies never really allowed any country to have the relations that kept trading easy to do. It was the post-war Europe where countries finally allied for better relations in trade and removal of tariffs at many levels that got them back on track.

The end of the cold war and the unification of Germany in 1989 gave the idea of a unified free trading and economic zone of Europe as a whole a firm rooting. A common currency, the Euro gave a lot of member nations a tough time marking their own currencies at parity. But this was just a hiccup as in the long run, it ensured that now every member nation had easier access to resources and facilities in better developed nations and also borrow finances to fuel their economic development.

Sadly, this was the space where most countries have got it wrong. When taking a bank loan, we are always asked to issue a collateral or bring in a guarantor to support.  It is a further must for the two to be presented if your own credit rating is weak. The smaller countries like Greece were never in a shape to manage their global debts against their own incomes (usually taxes). But with easy access to global finance and backed by the fact that they are a part of Euro, borrowings increased beyond manageable levels. Public spending on government funded projects, pensions, tax waiver and all kind of populist policies have meant the money borrowed is never coming back.

It wasn’t surprising that when the slow down hit the world in 2008, it was the smaller economies in Europe that had money either invested or borrowed from the US went down. With United Kingdom not a part of Euro and France playing a second fiddle; it was up to Germany to assume the role of big brother and pull up the debt of all these failed economies. But not without conditions towards imposing austerity measures to be implemented by the countries failing to bear its own debt.

But this is easier said than done. When Government implements measures to cut down spends, it means that people are likely to lose jobs, spend less and in turn end up paying lesser taxes. Less tax means the government earns less and cannot repay its debt. What this means is that even with stronger economies in the Euro picking up the tabs and bad debts, this cycle might not end. This is a space where today we have 17 countries linked by a common currency and trade agreements – but the political will, tax structure and the ways to earn an income and spend are vastly different among the member countries.

The Utopian plan would be a uniform currency, tax policy and governance style across the member nations – which is definitely unpopular on a political front. But one thing for sure, the vicious cycle of debt ridden economies has begun. People are going to have a tough time and recoveries are going to be slow and harsh. As for the immediate, someone is going to have to step in and pick up the tab for all of Europe.

Wednesday, July 8, 2015

Start Ups and Hiccups

We always like to idolize people who stand apart from the ordinary and make themselves noticed in a crowd. So while most people around me in college looked up to Edison, Einstein and Hawking as gods, the business minds admired the Tata, Birla and Ambani clan as inspiration. Deviation from the regular job to entrepreneurship might have clicked in the mid-80’s and the era of economic liberalization had started to build the foundation of entrepreneurship.  People who had a sufficient understanding and experience of how to do business in their domain floated on their own. This was what I shall term as the conventional approach: Learn the rules – master the rules – break the rules.

But this chain of order has now been smashed and a new order on the path of entrepreneurship has been established in recent times. It’s the culture of friends and roommates from some of the much revered technical and business schools hatching an idea, finding investors and taking on the world to break the established business practices. It is this radical and rebellion of sorts that makes people like Sachin Bansal and Binny Bansal (Flipkart), Rahul Yadav (, Kunal Bahl and Rohit Bansal (Snapdeal) the new age business idols for the current generation.

Every single start up story has almost a similar beginning – the feeling that there is so much we can do to make things better and establish a new order. While some start up entrepreneurs have worked before they went on their own, most these days have an idea developed and launched from their hostel rooms and possibly find an investor in the idea even before they graduate. Not to mention symposiums from established giants like Microsoft Ventures have become like a breeding ground for start-ups and investors to come together and find mutually beneficial interactions – even leave the place with a deal in hand.

There is nothing to deny the fact that the entrepreneur culture is redefining the way business is done and services are provide. Technology and internet is changing the face of what we believed was the only way to do things. I’s sure we all have seen the infographic about Airbnb, Uber, Alibaba, Facebook and YouTube changing the face of various industry verticals and the perception that business can be done only in a defined manner.

While all of might be aware of the success stories, what is the success rate and why do the start-up acts fail? An idea at most times is like the USP or the competitive advantage that gives a start-up an edge and immediate traction. But this can only be in existence as long as the other either don’t catch up or innovate beyond to surge ahead. This is the space where things get a little dicey. Not to mention, investors are in for a long haul and look at break even and profits – not able to deliver is not an option at this stage.

Rahul Yadav has been in the news across for the last two weeks after being sacked as the CEO by the investors. It is not that his venture is not able to deliver; but the fact that every growth phase also needs to be made robust with consolidation and firm rooting before the next level was greatly overlooked. This is the space where great ideas need to be going together with great managers. The people who are needed to hold the company together and possibly also pull off a few decisions that keep the creative minds at rest for a while. It is the evolution of an entrepreneur from a rebel or maverick into a leader that counts at this point.

Three things I have cited recently amongst start-ups as I hunt for job opportunities:

Firstly, the scores of start-up companies which have come up and are looking for people to work with them because they have lost their way. From a number of interactions with such people, I have been able to discover a few startling facts. Yes, most start-ups begin operation with angel capital which is usually the pocket savings of the people involved. With expenses and investment in technology and infrastructure, the ideal turnaround time from the idea to implementation and acceptance needs to be under a year.

It baffles me when there are start-ups with having invested close to two years don’t even reach a beta stage. In one case, the marketing function was required to deliver results in 8 months where a target market was yet to be defined. Not to mention, the idea was already finding feet with established players like Evernote and Google to make the app redundant even before release. In another, a start-up with no clients or established service offering was looking for funding and needed media presence (castles in the air) to achieve this. I feel this is a case of tunnel vision and people often lose touch with reality having invested too much time and effort into their own obsessions.

The second being the fact that people are looking for like – minded people over more than anything else. So an IIT/IIM start up is more skewed for people from IITs and IIMs. It is not surprising that job portals can now have posts asking for a start-up partner, tech partner etc. from the premier institutes only to join the ones with ideas.

On the first level, it sounds good; like minds will gel and people will deliver. But how about another line of thought – an idea is no one’s domain and every IIT/ IIM is groomed to believe they are an invincible lot designed to rule the lesser minds. So how can one accept orders from another equal or not move out to pursue his/her own dream during the formative days? May be I’m wrong, but this seems like a complete recipe for a power struggle in the making.

The third and the one I believe is the breaking point – rapid expansions with no control on costs or break even periods. Most start-ups are technology driven and technology obsolesce cycles are shorter than even what Moore’s Law would have defined. Who could have thought that Orkut could have died and Whatsapp could have almost wiped Blackberry messenger. Not to forget, we are still debating if Amazon has ever reached a break-even point to date. Amidst such confusion, investors are pumping in billions in anticipation of backing the next big idea. These billions are being spent on expansions and hiring people at amazing pay scales. Offices are like party zones and massive monies are spent under employee welfare. So the big question is will there be a pay back to the investor at some point in the recent future and how long will the party last?

It was funny at times where I came across start-ups that were over 5 years old and were yet to make a big impact. Having spent their initial investor monies, they had now taken over a few other smaller players in a bid to attract more funding. Open fissures amongst the founding team, power struggles and crumbling client and revenues were just too evident.

I’ll like to end with a lighter note, a series by TVF called Pitchers which revolves around a bunch of guys preparing to build a start-up. The manager accepts the resignation of this employee, but runs him across a list of names – all his classmates but only a few who made it big. It is easy to think of a start-up, it is much tougher to manage the hiccups.