Rajesh Jain

I realised that I had gone astray in the chase for valuation. I had become an investor in my business trying to become a unicorn (even though that word did not exist then). I had thrown all caution out of the window. We had hired indiscriminately, and had lost control of the expenses. I chased a rainbow. I had forgotten my own lessons in building IndiaWorld a decade ago. The sermons I gave on profitability – well, I had started doing exactly the opposite.

Bhavana opened my eyes. And I learnt a lesson I have not forgotten to this day. The purpose of a business is to create value for its shareholders, employees and customers. And it cannot do so if it is not profitable. It is hard to do it with an insatiable appetite of funds with all kinds of bad habits creeping in.

As it turns out, that story did have a happy ending. In less than a year, we made the business profitable. And Netcore has never lost money after that in the past 12 years.

We have gone through multiple shocks over the years – and every one of them has made us stronger. We are what Nassim Taleb would call antifragile. And that is probably true of all proficorns. Each one has a story to tell. But the world is fascinated by the stories of funds raised by young startups, not the profitability of older companies.

It is not that the world does not need capital to fund companies. Some businesses do require capital to begin with. The problem is when raising capital becomes the primary business model rather than embarking on a path to creating a profitable and sustainable business. That’s the contrast I wish to draw. There is an alternate model to build a business, and it is in times of crises that the differences stand out.

For entrepreneurs, the choice is for them to make. For me, building a business that is antifragile, that has the innate financial heft and freedom to convert a crisis into an opportunity, and that can hire and grow is the right way to do business. The Proficorn Way is my choice. What’s yours?

Unicorns are fragile, while proficorns are antifragile. To understand this very important difference, let us first understand what Taleb means when he talks about something being antifragile. Here is an excerpt from his book:

Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty. Yet, in spite of the ubiquity of the phenomenon, there is no word for the exact opposite of fragile. Let us call it antifragile. Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better. This property is behind everything that has changed with time: evolution, culture, ideas, revolutions, political systems, technological innovation, cultural and economic success, corporate survival, good recipes (say, chicken soup or steak tartare with a drop of cognac), the rise of cities, cultures, legal systems, equatorial forests, bacterial resistance … even our own existence as a species on this planet. And antifragility determines the boundary between what is living and organic (or complex), say, the human body, and what is inert, say, a physical object like the stapler on your desk.

The antifragile loves randomness and uncertainty, which also means— crucially—a love of errors, a certain class of errors. Antifragility has a singular property of allowing us to deal with the unknown, to do things without understanding them— and do them well. Let me be more aggressive: we are largely better at doing than we are at thinking, thanks to antifragility. I’d rather be dumb and antifragile than extremely smart and fragile, any time.

Crises make unicorns weaker and proficorns stronger. Unicorns are fragile, while proficorns are antifragile. It is the stresses that makes the proficorns who they are.

Netcore faced a big crisis around 2007-8. For a while, I too was taken up by the chase for valuations. Before I realised it, we were losing Rs 1 crore a month, chasing a mythical valuation of an SMS-led, capital-fed consumer business. It was at that time that my wife, Bhavana, returned to Netcore after a 3-year break following the birth of our son. She was aghast at what she saw and gave me an ultimatum: be profitable in a year, or shut the business down. Her training in accounts —  she is a CA — did not allow her to see money just being burnt at the altar of something as ephemeral as valuation! That was what opened my eyes. It was a lesson in financial management that I did not forget.

Tomorrow: Proficorns vs Unicorns (Part 6)

For me in Netcore, this is a great opportunity to look at expansion – to complement organic growth with acquisitions. The money saved for rainy days now comes in handy. It is like the tale of the ant and grasshopper. All the past hard work can now bear fruit as new worlds open up and assets that were previously unavailable could perhaps be bought at attractive prices.

Opportunities come not just in the form of acquisitions, but also in the form of hiring talent and acquiring new customers. By viewing business as an infinite game, proficorns can use troubled times to lay a very strong foundation for the future.

Crises are an opportunity to put one’s head down and reimagine the world that will emerge on the other side. One cannot do that if one doesn’t have control over one’s own destiny. For the proficorn founders, there are no investors with blanket diktats breathing down their necks. They can sit back with a cool mind and not worry about the next quarter or two, but think of the future beyond. That is how breakthrough businesses are built. I have always believed that when I am building a business, even as I have to worry about Monday morning, we are actually “competing for the future” – one that we have to create.

In good times, everyone can thrive. Those who splurge more can perhaps move faster. But this growth has its costs. There are economic cycles. And when a slowdown or downturn comes, the fall can be fast. It is the bad times that separate the truly resilient ones from the others. The skin in the game that founders of proficorns have enables them to see around corners much better, and this creates a better built-to-last business.

So far, we have seen two big differences between unicorns and proficorns during tough times: the fire vs hire mindset, and a crisis vs opportunity worldview. There is a third big difference which gets magnified.

Tomorrow: Proficorns vs Unicorns (Part 5)

The second big difference during challenging times is the mindset of the founders and entrepreneurs – unicorns see a crisis, proficorns see an opportunity. And central to this is the idea of “skin in the game.”

In unicorns, founders are left with a small stake after multiple rounds of funding. While the value of their holding increases (on paper), the investors become the majority owners of the company. It is not uncommon to see founders with just a 10-20% share in the company they founded. As a result, the investors call the shots. The founders become glorified managers in the very company they created. They are simply working to increase the wealth of the investors – for whom the company is just one among many investments. In other words, the founders have very little skin in the game.

As a result, when investors see a crisis because of capital and liquidity issues, the founders are forced to see the world the way the investors see it. It is time for “crisis management.” Customers are not the priority; protection of the invested capital is. And for that, if employees have to be fired, so be it. If customer service has to be reduced, so be it. Survival is the only goal that matters. This crisis mentality permeates all decision-making. It is like there is no tomorrow or the day after – just today that needs to be gotten through. Very few investors have the luxury of giving the founders the operational freedom to think long-term and make their own decisions.

In proficorns, a different mindset operates. The founders have no investors to report to. They have complete skin in the game. The company is their life’s work. If the company dies, they lose a part of themselves. Proficorns become what they become by going against the flow. And this is where founders of proficorns see a crisis as an opportunity. When others are panicking, it is time to sit with a cool head and think ahead – look beyond the immediate to the new world that will be created once the tempest fades away.

Tomorrow: Proficorns vs Unicorns (Part 4)

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)