Venture capitalists, diversification and innuendo

Sometime back I was talking to a friend who is a venture capitalist, and pointed out about how one of the companies he has invested in has a great opportunity for diversifying their opportunities (I had a vested interest, for I wanted to get involved in the said diversification). This guy (the VC) wasn’t too pleased, and he said that while an opportunity existed, he wasn’t in favour of the company pursuing this opportunity.

Talking to other friends who are in the VC industry since then, I understand that in general, venture capitalists are loathe to let their portfolio companies diversify. I had never really understood why, until I discovered it for myself when I was writing this post on whether you should go to market with a focussed offering or offer a bouquet of related products. In this post on LinkedIn, I write:

..if you have venture funding, your investors will not want you to expand scope. Venture capitalists are extremely loathsome about their portfolio companies diversifying – for it makes it harder for the VCs to flip the company at a later date (the VCs themselves achieve their diversification through their portfolio, so they don’t need a particular company in the portfolio to diversify).

Bingo! There’s no surprise that VCs hate their portfolios to diversify!

Anyway, while I was editing the above post, I realised that there are some instances where I’ve written stuff that can potentially have double meaning. Since I had written those lines when I was in the flow of writing the post and I wrote them with the best intentions and no puns intended, I let them remain. Here is possibly the best (worst?) of them:

Secondly, expanding after you’ve penetrated is hard on several counts

Read the whole post!

YoY calculations should be based on Hindu calendar

Deepak Shenoy at Capitalmind has an excellent post dissecting the 4.2% drop in the Index of Industrial Production in October. One of the keys to the drop, he says, is that this year both Diwali and Dasara fell in October, and since factories give workers off for these two festivals output falls. He has an informative (but ugly) graph showing this:

I was talking to a retailer recently and he was talking about sales in terms of Indian festivals – like Diwali and Dasara and so on. Retail analytics, we figured, need to take into account things like “Diwali sale”, “Aashada sale” and so on.

So while we have been using the Gregorian calendar for most purposes, it seems like our business cycle still follows the Hindu calendar. From this perspective, issuing statistics based on Gregorian months (such as October YoY IIP) is simply wrong, and has the ability to mislead.

I hereby propose that we go back to our roots and start publishing these YoY statistics on Hindu months. The only problem is we won’t know how to deal with the “adhika maasas”.

The cross-selling epidemic

Cross-selling is the phenomenon where you try to get more value out of your existing customers by selling them other things. And from the looks of it it is reaching epidemic proportions in India.

Yesterday a guy came up to me at the gym and asked me to try out some “power yoga” group exercise classes. I told him I wasn’t interested, and he continued to talk (I was on the treadmill so couldn’t run away). Of course my membership includes any group classes so I don’t have to pay more to do “power yoga” but the economics are not the same from this guy’s perspective!

Then for the last two weeks my gym (Gold’s Gym in Jayanagar) has been full of advertisements for protein supplements. And today some of their salespeople had even set up shop inside the gym hawking their stuff. From conversations I overhear in the locker room I know that several other members of the gym regularly take such supplements but the kind of advertising within the gym was way too intrusive!

Later today I had gone to visit a dermatologist (who I found via Practo) for a rash I have on my hand. The doctor seemed least interested in checking me and more interested in putting me through a battery of blood tests (which were done in the lab attached to the clinic). I don’t know why I went along but after becoming poorer by a thousand and three hundred rupees I figured that the tests included liver function and thyroid function test! Why a dermatologist would need such tests I don’t know! Anyway I’ll just pick up the reports tomorrow and run! Oh and when I was walking out the receptionist helpfully pointed out that I could buy the prescribed medicines at the little pharmacy also in the clinic! I refused an walked out!

A few months back I’d gone to my ophthalmologist for a routine checkup. After having got my eyes tested I asked him to check for my power on contact lenses also. He said he’ll do so if and only if I were to buy the lenses from his clinic! Since I’d found those lenses to be of poor quality the last time I’d got them, I scooted. Oh, and this guy has been my regular ophthalmologist for over twenty years!

This brazen cross-sell seems so suboptimal that it possibly drives away customers (but from what I hear, if every doctor indulges in such practices there isn’t much choice anyway!). I wouldn’t have minded paying an additional sum (over and above what I’d paid for my generic eye test) to get my eyes tested for contact lens power also. But this option (which would’ve worked out more simply for both of us) wasn’t available! Bizarre, I tell you!

Pricing markets in cabs and beer

Earlier this evening Udhay and I shared a cab back after beer and biryani. We don’t stay particularly close by (using the place we met as point of reference), but I think it was pareto optimal for us to share the cab rather than take two cabs. I got off first at my place and Udhay went on to his place. We used Uber’s fare splitting feature for the trip.

I just got the bill and saw that I’ve been charged exactly half of the total bill. Given the distance from our meeting point to my place and Udhay’s place it perhaps was pareto optimal but had we met any closer it may not have been a fair split – if the place we met was closer to my place than my place is to Udhay’s, then splitting the fare equally would have been unfair to me – for I would have paid more for sharing the ride than I would have had I taken a cab by myself! Can Uber do better?

Once we have enabled the ride sharing and splitting thing, Uber knows who all are travelling, and Uber knows where each of us gets off (if our phones are on, that is). Based on where we break off from the cab, can Uber estimate where each of us got off and split the fare accordingly? Given how good their app has been so far, I would expect them to tweak their ride splitting algorithm and introduce this measure soon.

Going a little back in the day, Udhay and I were at Punjabi By Nature in SuddgunTepALya. We were there during the restaurant’s “happy hours” where they have a buy-one-get-one-free offer on beer. However, it was after we had ordered a “tray” of samplers that we were told that the Bogof didn’t apply to the tray. We also ordered another glass of beer, which duly arrived with a “partner”.

There are two things about Punjabi By Nature’s pricing that I found interesting. The first bit was the non-applicability of “happy hours” to the tray. Is it a measure by them to reward their regular customers who know what to drink at the cost of first-timers who invariably ask for the sampler set? Any other explanation for happy hours not applying to the tray?

The second interesting bit is about the pricing of the drinks itself. A 500ml glass of beer was priced at Rs. 240 plus taxes, which is par for the course for a microbrewery in Bangalore. In most other microbreweries, the sampler trays are priced “reasonably”, approximately at the same per-ml price as the glasses of beer. Here, though, the tray (on which we didn’t get Bogof, remember) was prices at Rs. 625 per taxes! Of course, there were six beers that were sampled in the tray and the quantity was also significantly more than at other sampler trays (here it was at least 150ml per glass if I’m not wrong; in other microbreweries in Bangalore it’s more like 100ml), yet the premium in pricing for the samplers was significant!

I wonder what makes other microbreweries price their samplers at about the same per-ml cost as their glasses – given that the standard practice is to incentivise customers to buy in larger units. I also wonder what makes Punjabi By Nature impose a “penal” price (assuming it was 150ml per sample, it works out to about 70 paisa per ml. The glass of beer (not accounting for happy hours) costs 240/500 = 48 paisa per ml, so the sampler is 50% more expensive) on its samplers. For now that I know how it’s priced, the next time I go to Punjabi By Nature I’m going to order glasses of beer (hopefully in happy hours) and not the sampler!

Pricing is a funny game, I tell you!

The finiteness of the global advertising market

In this excellent post on social media companies, Aswath Damodaran articulates something I’ve long wondered – about the finiteness of the global advertising market. Given the number of companies that come up with new mechanisms to match advertisers with consumers, one can be forgiven for believing that the market for advertising is infinite. That the more avenues you create for serving advertisements to people, the more the advertising that will flow, and there won’t be a let up anywhere.

This picture here is from Damodaran’s blog (which I recommend you subscribe to, since every single post is worth reading). Based on the numbers that Damodaran presents here, the overall growth of the worldwide advertising market seems rather low.

Source: Aswath Damodaran (http://aswathdamodaran.blogspot.in/2014/11/twitters-bar-mitzvah-is-social-media.html). All numbers in billions of dollars

The number to take away for me from this calculation is the shrinking pie of non-digital advertising. Based on these numbers, the total non-digital advertising market in 2008 was $468 billion. In 2014, going by the same numbers this is down to $400 billion. This de-growth is significant and holds important lessons for other sectors that are dependent on advertising.

So far, the flow of advertising capital has been taken for granted and the number of business plans made (in both old and new economies) with an assumption on advertising growth is endless. If you want your local bus utility to make more money, you rent out advertising space on buses. If a low-cost airline wants to make more money, they put advertisements on the back of seats (a very good idea since it gets undivided attention for the duration of the flight). It is a surprise that insides of toilet stall doors (which again get undivided attention) haven’t fallen prey to advertisements yet.

The point here is that while it is all well and good to plan businesses based on advertising income, what we need to keep in mind is that the advertising pie in the long term grows at the same rate as the global economy. Sooner or later the waters will recede to the natural level, and then we will know who is swimming naked!

 

Perverse regulations

So Uber has tied up with PayTM to process its payments without a second factor of authentication in order to comply with RBI regulations. This is a major win-win for both companies. Uber can now gain access to the part of the relatively affluent Indian population that does not own a credit card (this is a significant segment). PayTM now has a compelling reason to sign up users for its Wallet solution, since all Uber customers now form a sort of a captive audience for this solution.

While discussing this on twitter, someone suggested that once the new Payment Bank regulation is brought in by RBI, wallet solution providers such as PayTM can then set themselves up as Payment Banks.

The problem with that is that if PayTM becomes a payment bank then it will have to comply with RBI regulations of second factor authentication and thus Uber users will not be able to use their PayTM wallets (now accounts) for seamless payment!

#Thatzwhy we need strong regulations.

The Steven Davis Role

The first encounter between Liverpool and Southampton in the 2013-14 English Premier League season happened at Anfield in September, and Southampton won 1-0 with a Dejan Lovren goal from a set piece. So when the two sides met again at St. Mary’s in the latter half of the season, with Liverpool chasing the title, it was known that it would be a tough game for Liverpool.

Southampton dominated the first half, playing a front four of Steven Davis, Adam Lallana, Jay Rodrigues and Rickie Lambert. However, it was Liverpool who scored in that half, and led 1-0 at the break. Here is a picture I found on twitter that was uploaded at half time:

Southampton manager Mauricio Pochettino decided to change things for the second half. He took off his most unspectacular forward player Steven Davis and replaced him with Gaston Ramirez, the promising Uruguayan. Soon, Southampton unravelled and Liverpool completely dominated the second half as they won 3-0.

Now, there is no doubt that Ramirez is more talented than Davis and is definitely a better player in general. However, in the context of the rest of Southampton’s team, Ramirez’s introduction proved to be a disaster and there was little cohesion in their attacking play from the time he came on. Southampton became a disjointed team and went out of the game.

This has led me to define what I have come to call the “Steven Davis role”. It is basically a player who is not individually the best, but provides some kind of a glue that holds the team together. The player’s key skill, rather than looking at it from traditional axes such as passing or shooting or tackling or intercepting, is to change position, and to make sure that the team holds its shape at all times. It is to make sure that any players who are out of position are covered for, and that the attack retains its shape and focus.

Now, it must be remembered that last season Southampton’s attacking play was primarily based on strong movement and interplay between their front four. They had nominal positions defined, but they hardly stuck to those as they moved around in attack. Thus, Lambert who would start upfront would sometimes appear on the wing, with the nominal “number ten” Lallana going forward, for example.

And key to this system was Davis, who wasn’t particularly talented, but who would move in a way that would balance the attack. If the other three would move left to attack, he would take up a position slightly to the right – not too far away from the attack but providing a kind of counterbalance. He never led attacks himself, but he was always available to support the others’ attacks. And this is what made Southampton dangerous.

Once Davis had gone off, Southampton had no one to play this role. The kind of interplay they had in the first half disappeared. And their attacks became toothless and each attack had only one dimension which was easy to cover even for Liverpool’s normally shaky defence, as they kept a clean sheet.

It was a similar case I saw last night at the Camp Nou, with Barcelona’s Pedro Rodriguez playing in a “Steven Davis” role. Messi started in the middle and Neymar wide on the left. Pedro nominally started on the right. But soon it became clear that he was a kind of a “wide support striker” – his job was to appear in positions that complemented the rest of the attack rather than being in positions where he led the attack (though he did lead one glorious counterattack where he hit the post). It was like a kind of balance that he offered the team, and ensured their attacks had coherence (of course this being Barcelona they had Iniesta and Rakitic just behind to offer more “focal points”).

Last night was the last game of Luis Suarez’s ban, and it will be interesting what Barcelona do with him when he gets back this weekend. The instinct will be to remove Pedro in his favour, but it is not clear if an attack of Messi-Neymar-Suarez will be able to offer the same kind of coherence as an attack of Messi-Neymar-Pedro. That said, Suarez is an extremely intelligent player and showed in his Liverpool days that he is capable of being a “fighter”, so he might as well be played. But that will mean that Neymar will have to occasionally play the Davis/Pedro role, and it is not clear if he is capable of doing that.

We are in for interesting times.

The post has so far focussed on football but it is evident that his kind of a role is necessary in other team situations, including corporate teamwork, also. Sometimes you need that one guy who need not be individually spectacular, but is versatile and mobile enough that he can do several things, fill in for different people and make sure that any team he is part of will be “complete”. And in the absence of one such guy, the team can lose coherence and fail in its task.