When Netcore’s CEO, Kalpit Jain, asked me for advice on whether we should go ahead with our hiring plans or slow down, my answer to him was: “This is a great opportunity for us. We will increase our costs if we go ahead with the offers made and new hires planned and that will decrease our profitability for the coming year or two. But this is a time to build for the future. Let’s continue with business as usual, even though revenues will be lower. Focus on efficiency where possible, but let’s not try and overly worry about every line-item cost. Business is a continuum – if we can keep the focus on our employees and customers (because we have no investors to worry about), we will come out ahead. Raise the bar for hiring and go ahead. This is the time to improve our talent and make the right investments in the future – and quality talent is the best investment we can make. Because there always is a tomorrow.”
There is one more reason for not going aggressive on the hire-fire culture. It creates uncertainty, which leads to tension and mental agony for employees which then undermines performance. No one knows when the next wave of cuts will come. It pits management against the employees – at the time when both need to be in complete sync to make sure customers’ interests are not compromised.
At Netcore, I have always taken the long view – good times don’t always last so one must save for rainy days, and neither do the bad times. Keeping a cool head and stable work environment is very important to ensure that happy employees deliver their best. That is how long-term value is created. The temptation is always there to cut staff costs at tough times like this, but as they say, every action has a reaction. Damage to employee morale stays – memories don’t fade easily when teams are damaged, friendships are broken and it becomes a battle for survival among those left. These scars don’t heal easily.
Tomorrow: Proficorns vs Unicorns (Part 3)
Previously I wrote about “Building a Proficorn”. (Decided to drop the hyphen in profi-corn after feedback from readers who said proficorn was a better way to write it.) Over the past month, as we have seen the coronavirus impact play out, we have also seen how companies have reacted in different ways to the crisis.
In this series, I will contrast the thinking between the proficorns and unicorns during difficult and uncertain times. While this is by no means a universal comparison, it will help accentuate two different models of building businesses. In the case of the proficorn approach, I will use examples from how my company, Netcore, has approached the challenges. The eventual choice is for each entrepreneur to make – given that each situation is unique.
Let me start with summarising what I wrote previously about the difference between a proficorn and a unicorn. I defined a proficorn as a company having four characteristics: profitable, private, promoter-funded and having a reasonable valuation (say, $100 million or more). This is an alternative to the “unicorn” growth model – where lots of capital is raised and burnt through quickly in the quest for rapid growth at all costs.
The first difference that has become clearly visible is that unicorns fire, while proficorns hire. We have seen many funded, loss-making startups lay off a part of their workforce. What goes up must come down. Even as they hire aggressively (perhaps overly so) during good times to focus on rapid growth without consideration of profitability, when the going gets tough the first instinct is to fire in order to control costs. There is also pressure from investors to control the burn – and employees tend to be one of the largest expenses.
Proficorns tend to view the world differently. Because of profits (and cash reserves) and without the external pressure of investors, proficorns can take the long-term view. One never wins by chasing the herd, but by being a contrarian. Proficorns can think beyond the immediate crisis and use the crisis to put their heads down and build for the new world after the immediate challenges have passed. In fact, at times like these, it is possible to even attract good talent – who have been fired by the hot-shot unicorns. So, the stability of a proficorn is an antidote to the mercurial nature of unicorns.
Tomorrow: Proficorns vs Unicorns (Part 2)
I did a webinar for Royzz & Co. (a Mumbai-based law firm) on April 18, 2020. The title was: “Accelerating Beyond COVID – 19: India, AI and Acquisitions“. I spoke for about 30 minutes, and then there was about 35 minutes of Q&A. Here is an outline of the themes that I covered.
- India’s 2 Futures
- Fork in the road: the 1947 Moment
- The political and economic choice we made then
- The 2 options we face now
- Everything Government
- We Determine our Destiny
- A Nayi Disha for India
- Public Asset Monetisation
- Dhan Vapasi
- Business: Search for Growth and Profits
- The power of AI
- Data is the starting point
- AI applied to Customer Analytics
- 200-20 Rule: where profits come from
- Identify your Best Customers based on Customer Lifetime Value
- Velvet Rope Marketing
- Madtech Growth Flywheel
- The Leader’s Top 2 Initiatives
- AI Inside
- Process Automation
- Acquisitions Outside
- Think 2008
- Stressed Assets
- Cash and Deals
As we live through these difficult times of the virus and lockdown, I know that Netcore will come out even stronger – we have converted every crisis into an opportunity. As I told my colleagues at a townhall meeting recently, Netcore has 3 significant strengths compared to our competitors – profits, cash in the bank, and no investor pressuring us to cut 25% of our costs. This helps us take the long view – an “infinite mindset” in the words of Simon Sinek.
True, the next few quarters will be challenging. There is uncertainty about the future. I don’t have too many memories of 2008 since Netcore was very small then. But I know that the basics of business don’t change. Eventually, all businesses are valued based on their future cashflows – and for that, profits have to matter. All of us in Netcore are focused on creating a “built-to-last” business – without worrying on what the exit is going to be.
It is the same mindset I had at IndiaWorld – love the business enough to be able to run it for the rest of your life. Only then will one make the decisions to make the business stronger daily. If one is distracted by the objectives of investors and raising capital continuously to fund losses, eventually the interests of employees and customers will take a backseat. Profitability is a mindset and a founder’s DNA – it cannot just be developed overnight.
I hope the world will see more profi-corns. It is not an impossible mission – it just means committing to a different set of choices. By making employees and customers central to the mission, by ensuring costs never exceed revenues, by realising that there is no finish line in business, by continuously learning from mistakes and not giving up on the things that truly matter, by believing that profits and growth are both possible simultaneously – every entrepreneur can work to building a profi-corn. It is a happier journey.
Along the way, in IndiaWorld and Netcore, I made many mistakes – luckily, none were too serious to kill the ventures. As long as one gets the big decisions right, one will eventually win. A friend once asked me (after the IndiaWorld sale) – was I smart or just lucky? After some thought, my answer was that one has to be smart to benefit from luck.
Building a company focused on profits means making a different set of choices than one would if there was unlimited capital available. Of course, there have been very big venture-backed successes – most of the big tech companies today were all venture-backed in their early stage. But that does not make it the only route to growth and success.
In Netcore, we have survived many industry shifts. The company today is unrecognisable from the one 20 years ago, or even 10 or 15 years ago. I could never have imagined us having 600 employees, or a presence in many countries including the US. Yes, I did want to grow, but at each stage, it was climbing the next mountain – and then discovering there is one more mountain to climb! There is a long-term vision, but that’s only as good as the execution one can do over the next 12-24 months.
A friend once called Netcore a “survivor”. We have seen many challenges and challengers. Each has been overcome. We haven’t always been the first in a vertical, but our tenacity got us through. We worked hard to get it right. We failed in our expansion outside India for many years, but did not give up – and finally succeeded. As I see the Netcore flag planted across South-East Asia, it is such a joy to behold us helping customers beyond the shores of India. We did not get our initial foray into martech right, but have worked through it and now are competing with the best in class globally.
We can make these decisions because there is a long-term focus that we bring to bear. At Netcore, we live for our customers and employees. There is no third category (investors) that we need to worry about. And that, for us, has made all the difference.
Tomorrow: Building a Profi-corn (Part 5)
Netcore has been my second profi-corn. Its 22-year existence can be split into two parts – the first 10 years or so where we did not grow because of my inability to create commercially viable products (other than a mailing solution for enterprises). In the second period, post 2007 or so, I got out of the way and brought in professional management to help build the business. That worked wonders. Netcore’s growth over the past decade has been spectacular – funded by its profits.
Netcore has stuck to a single focus – solutions for B2C companies. It started with SMS and email, and over the past few years expanded to a complete marketing technology (martech) stack. We made many mistakes en route, but none serious enough to kill us. We weathered many storms, but never deviated from the focus on ensuring profitable growth. Netcore has been led by 3 CEOs over the past 13 years who echoed this belief on profits.
I may make it sound easy, but it has been anything but that. When one sees competitors raise and splurge money, there are moments of self-doubt. I have had potential investors tell me that I was sacrificing growth for profits. I had never thought of this as a trade-off, but I do take criticism seriously and have introspected on this many times.
My conclusion is that each company has a certain DNA and that replicates the founder’s core beliefs. By nature, I am a fiscally conservative person. Once in my life in Netcore, I took the “cash burn” path (with my own money) and chased valuation – before my wife (who has been more than my equal in both IndiaWorld and Netcore) brought me back on track. For me, growth means being profitable, and being profitable ensures growth. They are two sides of the same coin. It’s not an either-or when it comes to profits and growth.
Tomorrow: Building a Profi-corn (Part 4)
When I started off as an entrepreneur in 1992 after I returned from the US, my father had two pieces of advice for me: never raise debt, and never lose other people’s money. Over the past 28 years as an entrepreneur, I have followed both suggestions.
My first significant venture was IndiaWorld. I started it after a string of failures in the first two-and-a-half years after my return from the US. IndiaWorld was amongst the first few portals globally – launching on March 13, 1995. The focus was to deliver India-centric content to global audiences, using the Internet as a distribution channel. I launched it at a time when the Internet was not even commercially available in India.
The desire to be profitable soon was paramount in my mind. So, even as we published the content, it was not all free – there was a $20 annual subscription fee that stayed for the first two years. It helped cover basic costs. I also started a service to offer website development and hosting for Indian companies. That took time to take off, but it did. At its peak, we were managing 200 corporate websites. And somewhere down the line, advertising kicked in as the portals gained popularity with NRIs (non-resident Indians).
I met with many VCs during that period. In most meetings, I would quote my expected valuation right at the start. Very few meetings went to a second stage! I could do that because we were profitable and I was under no pressure to raise capital. I knew the limitations also – it was hard to attract high-quality talent, which meant our 20-person team was stretched to the limit. We also improvised. Samachar.com was born as a tech alternative to expensive news editors and journalists. Our Khel.com live cricket coverage was done by two office peons whom we taught how to use computers, watch TV and update the scores in real-time.
IndiaWorld was profitable within the first year of its operation, and stayed that way through its eventual sale to Sify for $115 million five years later. It was my first profi-corn.
Tomorrow: Building a Profi-corn (Part 3)
In a recent Netcore Advisory Board meeting, one of the members remarked that Netcore had built a very interesting and different model – of profitable growth, without raising external capital. This needed to be talked about more, as an alternative to the “unicorn” growth model – where lots of capital is raised and burnt through quickly in the quest for rapid growth at all costs. As I was listening, a word came to my mind – “profi-corn”. I said it aloud, and everyone loved it. I spoke about this in a US visit earlier this year, and got a positive response – the word has a certain ring to it.
I defined a profi-corn as a company having four characteristics: profitable, private, promoter-funded and having a reasonable valuation (say, $100 million or more). Building a profi-corn means making a different set of choices than a venture-backed company. This is what I want to talk about in this series.
I have done two significant ventures in my life (IndiaWorld and Netcore), and in both I did not raise venture capital. Both were bootstrapped and became profitable early on, and so I was not desperate for raising external funds. Both have been profi-corns. In IndiaWorld, I got an exit which valued the company at $115 million in 1999.
Over time, I have come to realise that chasing valuation only gets you so far – if the focus is on building a profitable business with the right business model, one can survive through all ups and downs. It is not that I have never tried to raise venture capital or private equity – it is just that in all cases, I was in a position to quote my terms (which never got met). That did not slow me down. It just forced me to do the right things to ensure growth.
So, what does it take to build a profi-corn? Is it a binary choice between profits or growth, and between the short-term or long-term? Is it possible to ensure a balance? Why are profi-corns so rare?
Tomorrow: Building a Profi-corn (Part 2)
I have been an entrepreneur for 28 years. I have had a few successes (IndiaWorld, Netcore) and many failures. One theme through my ups and downs has been the focus on building profitable businesses. And that’s where I thought of the word “profi-corn” – as a counterpoint to the unicorn craze that’s been going around.
Unicorns are startups valued at a billion dollars or more. Many unicorns have been created in the past decade on the back of large fund raises and growth at all costs. In the post-Covid world, some will survive but a few will die. All of them will realise the value of profits.
There are two ways for companies to fund growth: they can raise external capital in the form of equity or debt, or they can generate cashflows and re-invest those in the business. I have focused on the second approach in both my ventures. One needs some initial capital – which comes from the founders (promoters). The aim is then to create a business model predicated on getting to profitability quickly and then continuously re-investing for growth. Without external investors, decision-making is faster and much more long-term.
That’s where I coined the word – “Profi-corn”. It describes a company that is profitable, privately held, promoter-funded and also has a reasonable valuation (say, $100 million or more). Given that many founders have 10-20% left in billion dollar unicorns, the wealth creation can almost be equivalent for the founders.
How does one go about ensuring profitability? Does being profitable mean sacrificing growth? What about gains for employees? What about the value addition that investors bring in along with the capital? What’s the right choice for founders? We will discuss these in forthcoming posts.
Mukul Pandya had interviewed me in Jan when I was at Wharton. In it, I spoke about the future of marketing (omni-channel personalisation, focus on best customers, maximising customer lifetime value), Netcore’s roadmap, the “profi-corn” mindset to build companies, and what India needs to do to counter the current slowdown (which will get worse after Covid-19). All of these are themes I will explore in my future writings. A few excerpts from my interview:
- What should be the goal of marketing? What would I as a CMO love to do? I’d love to maximize the lifetime value of my customers, which means I need to identify from my current set, from my current cohort, who are my best customers. How can I get them to spend more? How can I engage with them more? Earlier, it was very difficult to do this. Every person was treated pretty much the same. The next question is: What are the characteristics of my best customers? How can I go out and acquire more such customers? A marketer now has the ability to almost craft the perfect company, the perfect organization, with a customer base of the best customers.
- Twenty percent of your customers account for 200% of your profits, which means there are probably a lot of customers who are actually causing you to lose money. That may not matter today, but at some point in time it will. Companies will start realizing that all customers are not equal and that they need to start analyzing their segments and figure out which customers they should go after. Which are the types of customers they need to attract and engage?
- Identify and engage with your best customers. That is the differentiated proposition that a company can create. That is the way to create valuation for their own businesses and incredible value for customers via omni-channel personalization. You can’t deliver that to every customer of yours. So focus on your best customers and give them omni-channel personalization.
- ….how we’ve architected the company…the word I like to use is “profi-corn.” Many of the unicorns have been burning a lot of cash. I felt we needed something new, a new way to build companies, the way we have built Netcore over the last 20 years.
- A profi-corn has four characteristics. It’s profitable. It is private. It’s bootstrapped — there is no external capital, which ensures that the focus is on employees and customers, and not investors. And it has a baseline valuation — let’s say $100 million. Unicorns have a billion-dollar valuation, but the founding team is probably left with less than 10% of it. So if it’s $100 million (for profi-corns), and the founding team and the employees own 100%, it’s almost the same thing.
- About a year-and-a-half ago, I put together an idea called Dhan Vapasi, which means wealth return. This is perhaps the most powerful idea to counter what we are seeing in India.
- Our idea was that you can start monetizing all these assets…bring out all the idle land or idle assets into circulation. As we start generating money from these assets, the idea should be to return it to the people. This is the people’s wealth. The government only controls these assets. It’s the people who are the owners. To counter the slowdown on the demand side, our proposal was that every Indian family can be given back Rs. 100,000 (approximately $1,400) every year. This effectively doubles the median income of a family in India. As they start spending, it starts the virtual cycle of consumption, manufacturing and job creation. I think if the government can do this it will put Indians on an irreversible path to prosperity. Do it for 10, 20, 30 years — that’s the kind of wealth which is locked up in India. That’s how you can replicate the Chinese success. You can pull out a few hundred million people from poverty in the next 10 years.