This post builds on the Dhando Investor post which with 20 comments was getting a bit cumbersome. Deepak Nadiger made an interesting comment and I wanted to respond and decided to do it with a fresh post. The hurdle rate discussion is an opportunity to be innovative and delight customers. In the businesses I have built in the past these have been central themes and I believe that there is an opportunity to build interesting plays that scale fast using the approach of innovation and delighting customers. In 1985 in India we used this approach and in four years built a business which had revenues of $12 million.
Time is the enemy of IRR which is why startups need to work extra hard to create value quickly. In the case of PayPal start to IPO was two years ( four is a hard par for the course). The PayPal IPO was post dot com bubble. In fact it was in late 2001 which was really dot com winter and a very tough time to IPO.
As usual please chime in with your views.
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On the hurdle rate phenomenon, it has a flip side too. It’s only when an investment avenue / Fund Manager is too sure of delivering IRR way beyond the hurdle rate, it might offer the features you seek….(No fees…yes, no STT/Service Tax I am not sure since these are indirect taxes).
But you might as well factor in that great demand for such proven avenues/ rock star Fund Managers will render them beyond the reach of every investor – and in that sense they can’t have mass appeal…scalable in value terms if you keep the ticket size big.
Many of the industry’s biggest names — Steven Cohen of SAC Capital, Paul Tudor Jones of Tudor Investment, Louis Bacon of Moore Capital, Steve Mandel of Lone Pine Capital and others — do not need to expand existing funds further and often believe that more cash would hurt their returns. Even when they find they have the capacity to take more money, they typically turn to their existing investors first.
Check this out : http://gpsurvivalkit.blogspot.com/2007/05/2-and-20-has-now-become-3-and-50.html [ Caution : my blog ]
First my two bits about the brand name : I have one of the best B-schools on my CV, that opens a lot of doors and i think it helps in the relevant places. But it stops at a point as people still have stereotypes…. I have trying to shift to the buy side for a year, most guys think a sell side experience helps rather than a hands on ops knowledge or growth consulting…. so i reserve my judgement about brands….
Aside, I helped a company in the logistics space, they have grown from 0 to 15 crores in a year and looking at a 5x growth this year…..as usual constrained for talent, but since its a not so glamarous sector nor a big brand , they are facing a huge crisis in recruiting talent….. so my take based on my experience has been ‘ a good brand helps in putting a good team which is so essential to get the sales curve up’ – market today in India is fairly mature where people will atleast give you 5 mins (?) to present the business case….
Bottomline for me from all the mid size companies I am consulting currently – capital – 10% dilution , market – burn midnight oil , regulation hire professional advisors ( lawyers, accountants) but middle management who can execute – priceless !!!
The hurdle rate fit is that nobody does it today ( innovative) and even though it may be good for customers they will not understand or buy it ( assumption).
On the hot vada-pavs I agree if it means adequate low priced functional design with no frills.
Interesting – firstly am not sure how the hurdle rate discussion fits here unless we’re talking from the fund manager’s point of view.
I think one key diff is the average Gangoo Taili does not have the Citi name. True, in 1985 it wasn’t easy to sell Citi but iirc that at the time public sector banks were highly shackled; and Citi was a fresh new face with a massive global name that was not something unheard of. Not to belittle the work involved; it would have been a stellar effort.
Think of “Hi, I’m from Citibank, we can do your cash management” versus “hi, I’m from gangootaili, we can do your…(slam)” Even if you only got in the door with the Citi name, the closure time would have been faster with a Citi behind it. The time needed to build a “track record” with a customer even after you close one deal, is hard hitting on the IRR. You need leverage for IRR. Citi provided the leverage. Gangootaili would kill for some leverage.
As an investor IRR is important. But if you back load the return, the IRR in the interim is inconsequential. You can get nothing for five years and then voila. That’s what happened with Vanguard. And most TV channels. And most insurance companies.
Also, customer delight does not always translate to money. Simple “customer satisfaction” is more likely to do so in a mass market. Niches are best served with wine and caviar, the masses like to go with hot vada-pav. Today we have mass businesses giving you cold vada-pavs (no satisfaction), or wine and caviar (can’t eat it on the train).
We need some more of them dabbawalas I say.
Krish,
I see where you are coming from. Hoever, let assure you that Citibank addressing domestic cash management in 1985 was as insane to our prospective customers as any start up because Citi had zero track record.and no branch network. We had no relationship with over 70% of the customers that we ended up getting and in 1989 ( four years later) for these their only relationship with Citi was domestic cash management. In fact for PSU they could not open an account with Citi but we still found a way to do their corporate cash management for them. We are talking here of collections and disbursements and not investment or treasury management. The Citi name helped to get access ( 30 min with a decision maker).
I agree with you that if prior to funding I insist on traction Gangoo will get no where. However, I have no intention of doing that. If Gangoo is not a turkey but has the potential to be an eagle or peacock then I hope to by getting involved and providing seed to help him or her ( not sure if Gangoo is a male or female or gender neutral name) achieve their dreams. My hope which may be somewhat vain is that like Basab my being associated with a startup may improve the prospects of getting next round capital.